Delivering the pawnbroking growth opportunity

In our 15 March initiation, Pawnbroking royalty, with strong, profitable growth, we highlighted that H&T’s core is pawnbroking and related retail services operations. The 8 August interim results confirmed that H&T is delivering on the opportunities, with i) gross pledge book lending up 22%, to £128m, and the end-period pledge book up 14%, to £115m (December 2022: £101m) – with this growth achieved across the customer spectrum, ii) retail sales up 11%, iii) scrap volumes particularly strong, with profits ahead of expectations, and iv) foreign exchange (forex) volumes rising 19% YoY, and at record levels. We have raised our revenue forecasts, although they are offset by higher cost of sales, expenses and finance costs.

• Core pawnbroking: A key message for us was that growth was achieved across the whole spectrum of customers, which is encouraging for its sustainability. Demand for pledge lending continued to gather momentum during 1H’23, at a time of reduced market supply. We believe H&T’s strong balance sheet, continued investment in its stores and economies of scale mean it is well-placed to seize opportunities.
• Costs: Payroll costs increased by 21%, of which 11% was due to planned increased staff numbers (1,637 vs, 1,423, including the Swiss Time Services acquisition). The other 10% included an accelerated pay award and inflation increases. There were unexpectedly large increases in non-payroll costs, such as insurance, which nearly doubled. Costs are significantly in the run rate.
• Valuation: We use a range of valuation approaches, including a Gordon Growth Model (GGM), a Discounted Dividend Model (DDM) and a Discounted Cashflow Model (DCF). On the assumptions we detail below, the average indicative valuation is 607p. As H&T is a growing business, there is upside potential moving forward the base year.
• Risks: H&T’s customers are cash-constrained. Its money laundering, stolen goods risk and other regulatory controls are appropriate to pawnbroking. We believe sentiment to the industry is a specific risk, which needs careful communication to overcome. Inflation risk to the cost base is also a specific short-term consideration.
• Investment summary: H&T is focused on delivering the opportunity in its core pawnbroking and related retail businesses. Having gained pawnbroking market share, and with the collapse of most other competitors, its strong balance sheet means it is structurally well-positioned to finance demand for small-sum, short-term credit. This generates a strategic, long-term competitive advantage from which to grow earnings. For 2023, there is growing customer demand from the cost-of-living crisis, with few alternative, regulated competitors.