Questor: pawnbroking could prosper in the post-Covid world and H&T is looking cheap
“Hope for the best but prepare for the worst” is a good maxim for pretty much all walks of life, but especially investment, where protection against losses should always come first.
While the economic outlook remains uncertain it may make sense to be on the lookout for businesses whose model is well adapted to tough times and one such firm could be Aim-quoted H&T.
The company is Britain’s largest pawnbroker and that operation represents roughly half of its revenues. The rest is represented by the retail operations: the sale of new and second-hand jewellery from shops and online, personal loans, as well as some gold purchasing, foreign exchange and cheque cashing services.
Some investors may fight shy of pawnbroking after the misfortunes that befell Albemarle & Bond. That one-time rival fell into administration in 2014 after rapid expansion left it exposed to a falling gold price and its last parent company suffered the same fate in 2019.
H&T actually stepped in at this point and acquired “pledge book” assets from both Money Shop and Albemarle & Bond, increasing its geographical reach and store estate in the process.
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Moreover, H&T has a much more diversified revenue stream and comes at a tempting valuation. Based on consensus earnings forecasts the shares trade on barely seven times earnings, while the £126m market value compares with shareholders’ funds of £122m, so H&T currently comes priced at about book, or net asset, value.
That appears to offer some kind of safety net, as does H&T’s business model, which should prove resilient in the event of any prolonged economic downturn owing to the pandemic.
A double-digit return on capital and strong cash conversion highlight the strengths of the business, whose pawnbroking shops are reopening after the lockdown. They will provide a potentially valuable service to those who lack access to high street or online banking.
Unlike the mainstream banks, H&T was not classified as an essential service during lockdown, hence the store closures. In response, senior managers took pay cuts and withheld last year’s final dividend.
That move, and the firm’s usual strong cash flow, mean that H&T believes it has sufficient cash and unused borrowing of its own to make it through the pandemic, especially once its £29m stock of gold and jewellery is taken into account.
Analysts forecast a swift return to the dividend list, which would be a welcome bonus, as would further advances in the gold price, although potential investors do need to keep an eye on the investigation by regulators into the unsecured personal loans operation that began last November.
An increase in loan impairments is also a risk, thanks to the difficult economic environment, although H&T proactively helped customers during lockdown with interest holidays and payment deferrals.
The lowly valuation could offer both protection from losses and the potential for gains.
Questor says: hold
Ticker: HAT
Share price at close: 325.5p
Update: CVS Group
Having committed one cardinal sin by overpaying in May 2017, this column has at least not compounded it with another by panic selling CVS Group’s shares. We may still be sat on a paper loss but last month’s trading update from the veterinary services provider suggests our patience could yet be rewarded.
Lockdown did not hit farm-based work too badly and, although practices geared to small animals were severely affected, they can now offer a full range of services and revenues were growing again in early July.
Improved staff retention, cost cuts and recurring revenue and cash flow from 415,000 Healthy Pet Club subscriptions also bode well for the future.
Questor says: hold
Ticker: CVSG
Share price at close: £11.43
Russ Mould is investment director at AJ Bell, the stockbroker
Read the latest Questor column on telegraph.co.uk every Sunday, Tuesday, Wednesday, Thursday and Friday from 6am.
