A 15% year-to-date drawdown at H&T (HAT:AIM) presents a buying opportunity at the UK’s biggest pawnbroker, a beneficiary of the cost-of-living crisis and the elevated gold price whose long-run prospects appear underrated on a single-digit PE (price to earnings) ratio.
Caused by inflation and rising interest rates, the cost-of-living crisis has turbo-charged growth in H&T’s core pawnbroking business in an exceptional last two years, sending the shares close to 500p by late 2022.
Yet a rise in consumer confidence has been choked off by new prime minister Keir Starmer and chancellor Rachel Reeves, who look set to take ‘painful’ decisions in the upcoming Budget, which suggests this cost-of-living tailwind could persist for a while longer yet, with H&T also poised to profit from constrained supply of credit elsewhere in the non-prime lending sector.
The AIM-quoted firm has multiple levers for long-term growth including significant store base expansion, and looks well-placed to deliver steady earnings progression and dividend increases in the years ahead.
Offering an attractive 5% dividend yield, H&T looks too cheap to us on a rough 10% discount to its latest reported net asset value (NAV) per share of 416p.
ABOUT H&T
Britain’s largest pawnbroker is also the sixth-largest retailer of quality, pre-owned and new jewellery and watches, operating from 281 stores across the UK at last count. Led by chief executive Chris Gillespie, the £165.7 million cap continues to see strong demand for its pawnbroking services as the availability of short-term, small-sum credit for non-prime consumers from regulated lenders has reduced significantly in the past decade due to credit quality, regulatory and financing pressures.
Despite having grown its pledge book by over 230% between 2015 and 2023, Canaccord Genuity estimates H&T’s share of its total addressable market remains tiny, less than 1% in fact, implying there’s a long growth runway ahead.
Small business owners, who may be excluded by mainstream financial institutions, provide an adjacent, growing lending market for H&T to target.
SCOPE FOR CONSOLIDATION
H&T has exciting organic and acquisitive growth potential in this fragmented pawnbroking market. As of 30 June 2024, the company had 281 stores in the UK, 55% more than its nearest direct competitor, and Gillespie has indicated the optimum UK store estate sits between 325 and 350, which implies a 16% to 25% increase in the size of the store estate.
The company also sells pre-owned jewellery, new jewellery and watches in store and online, and offers other services which act as a driver of store footfall. For instance, management is investing in growing H&T’s foreign currency business, which is building momentum and taking market share, and the company also offers cheque cashing and international money-transfer services in its stores.
Another potential upside catalyst for forecasts is any further rise in the gold price, perhaps driven by geopolitical tensions, which would further improve margins in H&T’s gold purchasing and pawnbroking scrap business.
Conversely, a sharp decline in the price of the yellow metal could negatively impact demand for gold purchasing, gold purchasing margins and scrap margins.
Results for the half ended 30 June (reported on 20 August) revealed a solid 12.5% year-on-year increase in adjusted pre-tax profit to £9.9 million. This was below what the market was expecting due to a seasonal increase in pawnbroking redemptions in the Spring, as customers chose to repay loans early, prompting analysts to downgrade their earnings estimates.
PLEDGE BOOK BACK IN GROWTH
These redemptions have subsequently normalised, and H&T’s pledge book is growing organically once again. Elsewhere, the retail business had a strong half, with revenue rising 27% to £29.3 million driven by bumper demand for watches in particular, and it is all to play for in jewellery and watches over the seasonally-important Christmas selling period. H&T’s board displayed its confidence in the group’s future prospects by hiking the half-time payout 7.7% to 7p.
In our view the company is well-positioned to build on the strong profit growth delivered since the pandemic.
While H&T had almost £50 million of net debt at the last count, the asset-backed balance sheet remains strong and the company operates well within its banking covenants.
For the year to December 2024, the broker forecasts an uplift in pre-tax profit from £26.4 million to £29 million, rising to £32.2 million in full-year 2025, while the shareholder reward is estimated to increase from 17p to 18p this year ahead of 19p next year.
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