S&U Update - Prudence & Sense
The trading update (7th December 2018) confirmed that S & U’s strategy is progressing according to plan. Specifically, against an uncertain economic backdrop, it has continued to impose tighter lending criteria at Advantage (motor loans) while it is proceeding cautiously with Aspen Bridging Finance (residential refurbishment). In combination, this has prompted slight reductions in our top of the range profit forecasts, but it has served, also, to reduce our expectations for net debt. Thus, we believe that S & U is improving prudently the quality of its medium-term loan book while sensibly maintaining its ability grow this further as uncertainty subsides.
S&U - Reaction Note - Aspen Decision Positive
S & U’s confirmation that it will extend Aspen Bridging Finance is another positive step in the progress of the company. While the success of Advantage (motor finance) has been evident, and will continue in our opinion, a more diverse lending base should add further to S & U’s medium-term prospects. As ever, the company is developing cautiously, extending the current £20m loan book to £30m, but there is evidence that there is strong demand for this product within SME residential developers. Concerns over the UK housing market through Brexit are relevant but, we believe, not material to this market. The current malaise has its roots in mortgage restrictions and the consequent shortage of stock. This is unlikely to change in the medium term. Thus, S & U’s position in a relatively niche market, short of funding, should be robust. Like most UK, consumer-focused companies, S & U has seen its share price come under pressure in recent weeks. On our maintained forecasts and against lending peers, theoretical value remains significantly above the current level.
UK House Builders - Crest of a Wave?
The next month promises to be important for the UK house builders: The Budget could contain changes to Help to Buy and planning (The Letwin Report is expected today). In addition, four of the larger pure builders will issue trading updates later in November. Ahead of this news flow, the sector has given up all the post-Referendum gains and many share prices are now below those of 23rd June 2016. The market appears concerned on two levels. First, that the second-hand market has stalled. Secondly, the immunity to this slowdown provided by Help to Buy is finite and its terms could be altered in today’s Budget. At this critical point for the sector, Crest Nicholson’s recent revised guidance may provide a potentially significant signal. Specifically, that while earnings growth may stall in 2019, cash generation, through active management of land holdings, could improve. There is precedent for this trend. Between 2008 and 2011, the builders managed to cut leverage substantially in the face of a very difficult market. The slowdown of 2008-2011 may not be repeated but there are signs that cash generation could improve. Yields may prove to be more important than earnings multiples to value.