Retrenchment from the big banks presents an opportunity for this specialist lender

He denied ever saying it, but American robber Willie Sutton will forever be known for his reported reply. When asked why he kept on targeting banks, he said: “Because that is where the money is.”

Regular readers may be wondering why this column keeps banging on about financial services firms, given the danger that the UK tips into recession, saving rates drop and loan arrears rise. But the counter argument is the same as Sutton’s reputed reply. Many of them simply look cheap, on an earnings, yield or asset value basis, and as such they both price in a lot of bad news and have the potential to surprise on the upside if the 
worst-case scenario does not develop.

S&U may just be a case in point, especially as consensus forecasts are already looking for a drop in earnings for fiscal 2023 and little progress in the year to January 2024.

Through its Advantage Finance arm, the Solihull-based firm provides non-prime loans for cars, while the Aspen Bridging business offers property loans for individuals and commercial borrowers, who wish to purchase or refurbish an asset. These are areas that the big banks tend to avoid.

But this creates the opportunity for S&U, which has an excellent long-term record of managing risk, as you would expect of a company that dates back to 1938 and can point to three generations of management by the founding family, which still has a major shareholding.

A trading statement released on Feb 9 reads well, not least as it reaffirms the company is on track to meet expectations for the 12 months to January. The consensus is looking for a drop in pre-tax income to £41m from £47m.

The market for nearly new used cars remains firm and although Advantage Finance is tightening its lending criteria, customer numbers are setting record highs. Net receivables increased by 18pc in the year, while Aspen Bridging added to its quality loan book by taking net receivables to £114m from £64m, even as the property mortgage market showed signs of slowing. Despite that jump, just one of 141 property loans is in repossession and only four more are showing arrears of more than 60 days.

S&U can borrow up to £210m from its own lenders and with £192m of those facilities already deployed, management will look to expand the firm’s borrowing facilities in the coming year.

A further sign of confidence is an increase in the second interim dividend to 38p a share from 36p at the equivalent stage a year ago. S&U has so far therefore declared dividends worth 73p a share for this financial year and that looks to underpin consensus forecasts of 133p for the whole year, especially as that implies a final distribution of 60p a share compared with 57p in fiscal 2021. That 133p forecast total payout implies a yield of 6pc, which looks attractive, especially when coupled with the forward price/earnings ratio of barely eight times.

Income seekers may be pleased to note that receipt of that second interim dividend on March 10 will take total payments from S&U to 440p a share since our initial study (April 2019), a figure that nicely supplements the near-20pc capital return.

We now await the full-year results, which are due for release on March 28.

S&U still looks to offer a good balance of potential for income and capital return.

Questor says: hold
Ticker: SUS
Share price at close: £21.20

Update: Just Group

Another one of our cavalcade of financials is retirement products specialist Just Group and we are off to a decent start here, with a double-digit capital gain in the wake of our first look at the FTSE 250 firm in December 2022).

An update on Feb 6 on an accounting standard change makes no odds to the investment thesis, as cash flow is unaffected, and it is cash flow that can both fund the dividend yield and – more importantly – further advances in the last stated tangible net asset value per share figure of 172p. Just’s shares already trade at a substantial discount to that.

Strong cash flow can also fund new business development and Just Group has a strong pipeline of defined benefit pension scheme transactions as companies seek to derisk their exposure. Bulk annuities already represent more than half of total sales.

Just Group still looks very cheap.

Questor says: buy
Ticker: JUST
Share price at close: 84.55p

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