S&U has smart ap­proach to motor fi­nance

Small cap stock looks at­trac­tive de­spite mar­ket wor­ries about its in­dus­try

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Motor fi­nance spe­cial­ist S&U (SUS) of­fers a de­cent 5% prospec­tive yield and trades at an at­trac­tive val­u­a­tion. Re­stric­tions over the type of bor­rower it ac­cepts as a cus­tomer and the types of fi­nance it of­fers mean it is less ex­posed to the risks as­so­ci­ated with the cur­rent credit boom in the car mar­ket, in our view.

The com­pany’s re­cently re­leased re­sults for the six months to 31 July make for en­cour­ag­ing read­ing. S&U’s pre-tax profit reached £14.3m, a 20% in­crease year-on-year. Its motor fi­nance busi­ness en­joyed its 17th con­sec­u­tive year of in­creased profit.

Chair­man An­thony Coombes says of all loan ap­pli­ca­tions, 70% are de­clined straight away due to S&U’s strict ac­cep­tance cri­te­ria. Of the re­main­ing

30%, only 3% will be given fi­nance.

The ben­e­fit of this ro­bust un­der­writ­ing ap­proach is re­flected in the com­pany’s strong track record.


There are well founded con­cerns about ag­gres­sive lend­ing prac­tices in car fi­nanc­ing, al­though these tend to be at the prime end of the mar­ket.

Gary Green­wood, an an­a­lyst at Shore Cap­i­tal, says man­u­fac­tur­ers’ fi­nance com­pa­nies con­tinue to of­fer cheap per­sonal con­tract plan (PCP) deals in or­der to help sell new cars.

He adds: ‘By con­trast, (S&U-owned) Ad­van­tage Fi­nance does not of­fer PCP, with all of its loans made on a hire pur­chase ba­sis with full re­pay­ment made over the life of the loan thereby mean­ing that there is no resid­ual risk to S&U at the end of the deal.

‘A loss would there­fore only be in­curred to the ex­tent that cus­tomers were to de­fault, with the lat­ter re­quir­ing a sharp rise in un­em­ploy­ment in our view, which is not cur­rently our cen­tral case.’

PCP in­volves a cus­tomer pay­ing a lower monthly amount dur­ing the con­tract pe­riod, typ­i­cally be­tween 24 and 48 months, leav­ing a fi­nal ‘bal­loon pay­ment’ at the end of the agree­ment. At this point they ei­ther buy the car out­right or switch their PCP agree­ment to a new car.

Ad­van­tage Fi­nance’s loans are not PCPs and are made on the ba­sis that full re­pay­ment will be made over the loan pe­riod, usu­ally up to four years.

One po­ten­tial long-term risk for the busi­ness is the evo­lu­tion of the elec­tric ve­hi­cle in­dus­try. If con­ven­tional com­bus­tion en­gine cars are re­placed by hy­brids and electrics which need less main­te­nance, there may be lower ve­hi­cle turnover and hence less de­mand for car fi­nance.

Ben The­fault, an­a­lyst at Ar­den Part­ners, says the com­pany is ‘sig­nif­i­cantly un­der­val­ued’ as it is weighed down by sec­tor sen­ti­ment.

Us­ing The­fault’s fore­casts, at £20.75 S&U is trad­ing on 10.3 times Jan­uary 2018 earn­ings per share of 201.5p. (DS)

The com­pany is ‘sig­nif­i­cantly un­der­val­ued’

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