Questor: S&U’s performance in sluggish times shows the strength of its model

Questor share tip: the specialist lender has shrugged off weakness in the economy and the shares should have further to go

Russ Mould 18 February 2020 • 6:00am

Second hand cars for sale are parked on a used car lot — S&U provides consumers with 'non-prime' loans for used cars Credit: Matt Cardy/Getty Images

We have already made a capital gain of 34.1pc, with a final dividend of 51p a share and an interim worth 34p thrown in for good measure, but last week’s trading statement suggests there could be more to come from S&U, tipped here in April last year.

Through its Advantage Finance arm, the company provides consumers with “non-prime” loans for used cars, while the fledgling Aspen Bridging operation offers property loans for individuals and commercial borrowers who wish to purchase or refurbish an asset.

Demand for used cars seems much more buoyant than for new ones and Advantage has an excellent record when it comes to choosing which customers to accept and setting the right terms so that the loan book is of good quality. Aspen takes a similarly selective approach.

Some investors may have worried unduly that Britain’s flaccid economy would hold back S&U and leave it exposed to bad debts. The full-year update offers reassurance on both fronts.

The chairman, Anthony Coombs, highlighted a post-election rise in transaction numbers at Advantage and increased customer interest at Aspen. Advantage processed a record number of applications in 2019 and customer numbers set a new high as net receivables rose by 8pc year on year. Collections also rose nicely at Aspen.

As a result the management team expects to meet analysts’ earnings forecasts for the year to January 2020 and existing financing agreements leave plenty of headroom for further growth in the coming 12 months.

The company has also declared its second interim dividend of 36p to take the total so far to 70p a share, a 4.5pc increase on the same stage last year. That helps to highlight the valuation case for the stock.

A yield of 5.1pc looks attractive, especially as S&U’s streak of increases in its annual dividend runs to more than a decade, and the forecast earnings multiple of 10.1 is far from demanding.

The valuation, at least in part, probably reflects continuing scepticism about the economy and an upturn would help sentiment, but S&U’s performance in the past few years shows the strength of its model and the potential for consistent cash flows and therefore further dividend growth.

Questor says: hold

Ticker: SUS

Share price at close: £24.20

Updates: TruFin and Distribution Finance Capital

S&U may be going to plan but unfortunately the same cannot be said for May 2018’s look at TruFin and its 2019 spin-off Distribution Financial Capital, even if a pair of tender offers from the former have at least put some cash back into the kitty.

The break-up of the original TruFin into two parts and the capital returns have failed to help the shares and it is becoming hard to see what may stir fresh interest.

Arrowgrass, the asset manager, aims to sell its 74pc stake in TruFin, which creates a nasty “overhang”, and the operations’ growth plans remain reliant on future funding.

Distribution Finance is still awaiting its banking licence and the delay is going to constrain lending growth substantially and slow the path towards profitability in 2020.

Both businesses have potential but the move into the black is taking longer than we expected so it is time to move on.

Questor says: sell both stocks

Tickers: TRU, DFCH

Share prices at close: 31.5p, 77.5p

Update: Carnival

We updated on the cruise line only four weeks ago but at that time few foresaw the extent of the coronavirus crisis and its impact on global tourism.

Carnival’s near-term earnings could well take a hit but the business is still fundamentally the same, thanks to careful investment and fleet management. Unless the viral outbreak becomes a truly global pandemic it seems logical to expect Carnival to bob back up at some stage. Sit tight for now.

Questor says: hold

Ticker: CCL

Share price at close: £31.03

Russ Mould is investment director at AJ Bell, the stockbroker

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