S&U PLC – Encouraged by the strong trading momentum

S&U (LON: SUS) is a FTSE All-Share listed Company, which provides motor finance and lending services across the United Kingdom.

The Company is expected to announce half-yearly results (ending 31 July 2020) on 30 September 2020.

Investment Rationale – Speculative Buy at GBX 1,543.00

• Profit after tax and Dividend yield has progressively increased each year since FY17. The dividend yield was above 5% in FY19.
• Over the past four years (FY16 – FY20), the Company’s revenue surged from GBP 45.18 million in FY16 to GBP 89.94 million in FY20. Compounded annual growth rate (CAGR) stood at 18.78%.
• The key trading multiples (EV/Sales, EV/EBITDA, Price/Earnings, Price/ Cash Flow and Price/Book) are currently undervalued compared to corresponding multiples of the Financials industry.
• At the time of update, total borrowing was £108 million against £98 million in June 2020, reflecting the dividend payment. The significant headroom will be maintained as existing committed facilities stood at £130 million.
• There is a risk of repayment delinquency with higher unemployment and dampened consumer confidence after Brexit and Covid-19 crisis.

Risk Assessments

• The macroeconomic fluctuations and Covid-19 uncertainties have been impacting consumer confidence. The Company can face liquidity risk with insufficient borrowing facilities.
• Moreover, the higher number of unemployment with Brexit and adverse economic conditions could lead to more repayment delinquency.

 Trading Update (as on 11 August 2020)

• With lockdown easing, business showed steady recovery since AGM update in June and trading volumes returned nearly normal.
• Despite the tough trading conditions, the Company is still profitable and paying dividends.
• Sales at Advantage Finance have recovered to around 80%.
• In the Aspen segment, current (at the time of update) net receivables were close to £19 million as compared to £15.5 million in early June.

One Year Share Price Chart

1-Year Chart as of 1 September 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Valuation Methodology

Conclusion

The recent update explicitly stated that the Company continues to make profits and has substantial financial resources to weather any further economic storms. In the longer-term, the demand for cars and homes in Britain will remain strong, which will be supported by a rising population. Stock 52 week High and Low were GBX 2,500.00 and GBX 1,420.00, respectively. From the technical standpoint, shares were trading well above the short-term support level of 10-day simple moving average prices, which reflects an upward trend in the stock and carrying the potential to move up further.

(Source: Company Website)

Based on the factors discussed above, we have given a “Speculative Buy” recommendation on S&U PLC at the closing market price of GBX 1,543.00 (as on 1 September 2020) with lower double-digit upside potential based 7.19x Price/Earnings (approx.) on FY20E Earnings Per Share (approx.).

River and Mercantile Group PLC – Delivered strong gross sales across each area of the business.

River and Mercantile Group PLC (LON: RIV) is a FTSE All-Share index listed Company, which provides advisory and investment solutions. It operates through four segments – Fiduciary Management, Advisory, Derivatives Solutions, and Equity Solutions.

Investment Rationale – Speculative Buy at GBX 169.00

• Over the past four years (FY15 – FY19), the Company’s revenue surged from USD 52.59 million in FY15 to USD 78.10 million in FY19. Compounded annual growth rate (CAGR) stood at 10.39%.
• The key trading multiples (EV/Sales, EV/EBITDA, Price/Earnings, and Price/Book) are currently undervalued compared to corresponding multiples of the Financials industry.
• Debt/Equity of the Company (0.06) is lesser than the industry median (0.16), reflecting the less leveraged state against industry.
• Revenue per share has grown at a CAGR of 11.07% over the past four years (FY15 to FY19), from 64.06 pence in FY15 to 97.48 pence in FY19.
• Over the past three months, RIV’s stock has yielded a positive return of 1.70% while the benchmark index, FTSE All-Share has given a negative return of 3.25%.

Risk Assessments

• The macroeconomic factors (such as unfavourable economic growth, interest rates movements, inflation, and exchange rates fluctuations) could impact the financial performance of the Company.
• Moreover, the inability to secure substantial financial resources to pursue investment strategies or meet debt obligations can lead to liquidity risk.

Recent News

18 August 2020: RIV appointed the joint Corporate Broker to Jefferies International Ltd alongside Numis Securities Limited, with immediate effect.

Trading Statement (for the three and twelve months ended 30 June 2020)

(Source: Company Website)

Summary of the three months ended 30 June 2020:

• RIV continued to make significant investments, and hence, fee earning AUM/NUM increased to £44.2 billion, by 9.3% year-on-year.
• Net flows were £1.5 billion while gross sales were £3.1 billion.

Summary of the twelve months ended 30 June 2020:

• Positive investment performance despite volatile market conditions increased fee earning AUM/NUM to £44.2 billion, by 11.1% year-on-year.
• Net flows were £3.7 billion while gross sales were £8.2 billion.

One Year Share Price Chart

1-Year Chart as of 1 September 2020, after the market close (Source: Refinitiv, Thomson Reuters)

Valuation Methodology

Conclusion

Despite the volatile market conditions, the Company continued to perform well with positive investment performance and strong gross sales across each area of the business. The recent recruitment of a new Head of Wholesale shall improve distribution capabilities and expand the wholesale channel. Adjacently, Derivatives and Fiduciary businesses have continued to perform well and experiencing new opportunities. Therefore, the Company look forward to the new financial year with confidence and will make significant investments to boost distribution capabilities and deepen investment resources to generate lucrative value for the shareholders. Stock 52 week High and Low were GBX 300.14 and GBX 152.00, respectively. From the technical standpoint, 14-day RSI is currently in an oversold zone, which means there is a good potential for a short term rebound in the stock price.

Based on the factors discussed above, we have given a “Speculative Buy” recommendation on River and Mercantile Group PLC at the closing market price of GBX 169.00 (as on 1 September 2020) with lower double-digit upside potential based 3.00x Price/Book (approx.) on FY20E Book Value Per Share (approx.).

*All forecasted figures and Peer Information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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