UK Edition
Questor: why a chain of pawnbrokers founded in 1897 is still a growth stock in 2019
Questor share tip: H&T has just added 65 new shops to its estate and is getting more from its assets by expanding into personal loans and foreign currency
When we updated readers last week on Questor’s most successful pick so far, Future, the publishing group, we decided to ask the fund managers responsible for another stock to see if they could repeat the achievement.
Future came to our attention courtesy of the team that runs the Octopus UK Micro Cap Growth fund, so for this week’s column Chris McVey, one of the fund’s managers, told us about another holding for which his team has high hopes: H&T, the pawnbroker.
Pawnbroking may not seem the most obvious 21st-century growth business but H&T, founded in 1897, is actually pursuing several paths to higher sales and profits: it is offering more services from its existing shops, selling more online and seeking to expand into new parts of the country.
“It is using its existing pawn shops to sell an expanding range of products and services, such as personal loans, foreign exchange and high-end jewellery,” Mr McVey said. “As far as its geographical reach is concerned, it has been well placed in the central belt of Scotland, north-west England and London but less so in other areas, such as the South West.”
The firm took steps to address that opportunity last month when it acquired 65 outlets from the Money Shop, taking its total estate to 249. H&T described the purchase as “a rare and significant opportunity to acquire a complementary portfolio of stores”.
Mr McVey pointed out that the Money Shop outlets had an average “pledge book” value of £77,000, whereas the average in the H&T chain was £285,000. “There should be no reason not to get to that level in the acquired shops,” he said. “We think there is great growth potential.”
Thirty-four of the outlets acquired from the Money Shop have lease renewals due within the next 18 months, which the fund manager said should give scope for rent reductions or store relocations.
The group issued new shares via a placing and used existing bank loan facilities to fund the acquisition but said “the continued strong cash generation of the enlarged group delivers rapid deleveraging”. Mr McVey said the balance sheet was “not stretched”.
He also praised H&T’s bosses. “We love the management team, who we have known for a long time. The chief executive since 2004, John Nichols, has been there man and boy and has a very prudent approach. He doesn’t buy at the wrong point in the cycle.”
He added: “Last year the firm grew profits before tax by 13.4pc and we think the market is being too sceptical about its ability to maintain that kind of growth. At a price-to-earnings ratio of 11 and a yield of 3.4pc, this is not an expensive stock. We bought more shares in the placing and hold H&T in two of our funds.”
Questor says: buy
Ticker: HAT
Share price at close: 325p
Update: Majestic Wine
When we last updated on Majestic in June we said there were many uncertainties about the group’s plan to sell its shops and become online only. Some of that uncertainty has now disappeared: the firm has agreed to sell its shops and some other assets for about £100m.
This will allow it to pay off its debts, invest in the Naked Wines online business and hand shareholders a special dividend of 5.2p a share.
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Naked has been growing strongly, especially in the US, and following the sale the company is likely to become increasingly American. So it’s appropriate that Majestic is reportedly considering listing its shares on Nasdaq, the market for technology and high-growth stocks.
“This looks like a shrewd move given that the UK stock market seems to be unable to place an appropriate valuation on Naked Wines, which is after all a growth business with potential to crack the enormous US market,” Thomas Moore of Standard Life Investments, a holder of the stock, told Questor.
“The original bull thesis on this stock seems to be back on track.”
Questor says: hold
Ticker: WINE
Share price at close: 274p
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.
