Fancy the chance to buy a profitable, growing business quite cheaply and get a nice income on top?

If so, act now and buy shares in pawnbroker, jewellery retailer and currency exchange company Ramsdens (RFX:AIM).

It has an undemanding equity rating, trading on a mere 11.3 times forecast earnings for the financial year to March 2018. That looks far too low given pre-tax profit is forecast to nearly double between 2016 and 2018.

You are also getting a prospective 4.6% dividend yield if buying today, based on Liberum’s forecasts.

The broker has a 162p price target, implying 14% upside over the next 12 months. Add on the 4.6% dividend yield and you could potentially get nearly 19% total return in a year.

What’s even more exciting is Liberum saying its forecasts have been conservatively pitched. We translate that as meaning Ramsdens’ earnings estimates could easily be upgraded if it can show that trading remains healthy as the year progresses.

Survived the gold fallout

The Middlesbrough-based company has its roots in the 1970s and chief executive Peter Kenyon says he has ‘hardened battle scars from the last gold debacle’.

Many pawnbrokers profited from the rapid rise in the value of gold between 2005 and 2012. They suffered from gold’s subsequent collapse including major player Albemarle & Bond going into administration in 2014.

Volatile commodity prices are still a major risk to the industry. Just under one third of Ramsdens’ revenue and approximately one fifth of gross profit came from precious metal sales in the year to 31 March 2017.

However, the struggles of rival businesses have played to Ramsdens’ favour. Many competitors are now shrinking in size, leaving Ramsdens clear to grab market share organically and through opportunistic acquisitions.

For example, Cheque Centre is thought to have closed all its shops in December 2016 due to regulatory changes. Ramsdens acquired four of that company’s branches that month.

Its currency exchange business should also benefit from the scaling down of some competitors as they were also offering retail forex services. Currency-related business now accounts for c37% of its       gross profit.

Company is exceeding expectations

The latest set of full year results beat market expectations despite analysts having upgraded estimates in April.

This is a well-run company which has been through many business cycles. It is managing to get more customers through its doors and has a large opportunity to improve operational efficiencies.

A weakening economic backdrop should also play to its strengths as pawnbrokers typically see increased demand when times get tough. (DS)

Ramsdens (RFX:AIM) 142p

Stop loss: 100p

Market cap: £44m

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