UK Edition
The Stoic Roman philosopher and senator Seneca once said: “I don’t know what is going to happen, but I do know what is capable of happening – and none of this will give rise to any protestation on my part. I am ready for everything.”
Investors should pay heed. No one has a crystal ball and therefore no one knows what is coming next, so it is best to be prepared.
One way to do this is to focus on valuation and not overpay to access a company’s profits and cash flows (assuming there are any), a lesson whose value is being reaffirmed this year as previously high-flying tech, growth and “meme” stocks crash-land.
Another is to build a balanced portfolio that caters for a range of outcomes. This is where H&T, Britain’s leading pawnbroker, comes into its own.
After a difficult start since our tip almost two years ago, largely thanks to shadows cast by an ongoing regulatory review by the Financial Conduct Authority of the company’s unsecured high-cost, short-term loans business, H&T is starting to generate paper profits for us, to supplement the cash dividend payments on offer.
At a time of financial difficulty for many, thanks to the cost-of-living crisis, this makes sense (unfortunately), and if Britain tips into recession H&T could become busier still as it provides finance at a time of great need.
There could be further hits from the FCA’s investigation, but the high-cost, short-term loan book has shrunk to £3.1m. H&T has also booked a £2.1m provision to prepare itself for the regulator’s findings and possible demands for compensation payments to customers.
Better still, the company is starting to rebuild the core pledge book after the pandemic-inspired dip of 2020-21 and the retail operations appear to be performing well too, if last week’s trading update is any guide.
At £84.3m, the pawnbroking pledge book is now 74pc larger than it was a year ago and 27pc larger than it was at the end of 2021. Lending volumes are now exceeding pre-pandemic levels. A further bonus is a relatively firm gold price, as volumes remain strong here too.
If the economic outlook darkens, H&T may therefore offer some portfolio protection as a business whose model is well designed to cater for such an environment. The shares’ lowly valuation means they also tick another important box.
Profits are also still some way below previous peaks of earnings per share between 44p and 48p. Granted, any further rises in the gold price may be needed to get there, but the shares really would look cheap if there were any repetition of those figures. Even if those levels cannot be reached this time, H&T trades on barely 12 times forecast earnings and offers a yield of 3.8pc.
The balance sheet is also sound and net shareholders’ funds of £137m compare with a market value of £144m. The shares therefore no longer trade at a discount to book value, especially if you strip out £20m of goodwill and intangible assets, but the lowly multiple of share price to net assets means the stock may just offer the right balance between protection from risk and potential for gains.
Hang on to H&T. Hold.
Questor says: hold
Ticker: HAT
Share price at close: 370.5p
Update: Grafton
A slide all the way down from £14, thanks to fears of a recession, means that all of our (once considerable) paper profit on builders’ merchant Grafton, tipped three years ago, is gone and more besides. News that its highly respected chief executive, Gavin Slark, is stepping down later this year has not helped sentiment either.
Having messed up a chance to bag a profit, we must now decide whether to stick or twist, and in the case of Grafton it should be worth sticking, even if news from the company could get worse before it gets better.
It has a strong competitive position, thanks to brands such as Selco and Leyland SDM* in Britain and Woodie’s in Ireland, while the balance sheet has net cash even after its lease liabilities.
The company is therefore well placed to come through any downturn that comes its way. Keep a grip on Grafton. Hold.
Questor says: hold
Ticker: GFTU
Share price at close: 763.8p
Russ Mould is investment director at AJ Bell, the stockbroker
*Originally we said the company also owned Buildbase and Plumbase, which were sold last year. We apologise for the error
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