Pawnbroker-to-jewellery retailer Ramsdens (RFX:AIM) has rallied hard off its Covid lows and shares in the Middlesbrough-based company are up 18% year-to-date. Yet despite such strength, we think the share price rise has further to go, with group profits now ahead of pre-pandemic levels. Consider this a short-term trade rather than a long-term investment.

Like peer H&T (HAT:AIM), Ramsdens is benefiting from the cost-of-living crisis, yet the pressure on disposable incomes should only intensify from here, suggesting investors might be willing to pay a higher multiple of earnings (a ‘rerating’) given the positive tailwind for the company’s earnings.

Guided by CEO Peter Kenyon, the diversified and defensive financial services provider and retailer operates from 158 UK stores and has a growing online presence.

Results for the year to September 2022 breezed past previously upgraded estimates, with underlying pre-tax profit rising from £600,000 a year earlier to £8.3 million on revenue up 63% to £66.1 million.

Profit growth was mainly driven by a rebound in Ramsdens’ foreign exchange volumes and increased demand for its value-for-money jewellery. ‘This momentum continued through Q1,’ said Kenyon, ‘with strong jewellery sales during December driven by continued consumer demand for premium watches.’

The £71 million business is seeing strong trading in its pawnbroking arm, a beneficiary of rock-bottom confidence around personal finances being helped by weaker consumer credit competition.

It is also worth noting that Ramsdens’ retail jewellery sales are spread equally across premium watches, new jewellery and pre-owned jewellery. Growth in Ramsdens’ precious metals buying business should be supported by the gold price remaining high.

Admittedly, there is a risk that foreign exchange demand falters as some customers buckle under the strain of rising interest rates and energy bills, but there is also the possibility the average consumer prioritises a summer holiday and needs travel money, which could offset a drop-off in demand from lower income customers.

‘We strongly believe that Ramsdens can deliver growth in any environment provided that stores remain open,’ says Liberum Capital.

The broker has increased its 2023 underlying pre-tax profit forecast by 4.7% to £8.9 million and its earnings per share estimate by 6.1% to 21.3p, estimates leaving Ramsdens on an undemanding prospective price to earnings ratio of 10.7-times.

Liberum argues Ramsdens is ‘significantly undervalued’ given that net cash of £8.8 million plus inventory of £22.8 million speak for roughly 45% of the current market cap. Liberum forecasts a rise in the dividend from 9p to 9.6p for the current year, implying a prospective yield of 4.2%.

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