Growing pawnbroking core will drive other services

In our 15 March 2023 initiation, Pawnbroking royalty, with strong, profitable growth, and later notes, we have highlighted the strong market for pawnbroking and why H&T, as the market leader, is uniquely placed to take advantage of these opportunities. Subsequent to the initiation, we had raised our pledge book forecast twice, and we do so again with the latest trading statement. In this note, we explore how pawnbroking growth is a key driver to the retail offering, pawnbroking scrap and gold purchase, with varying degrees of time lag. Like many in the retail space, H&T faced the challenge of customers focusing on lower-value, lower-margin items in the key run-up to Xmas 2023. We have cut 2023E PBT by £3m (11%).

• Core pawnbroking: The key long-term investment message for us was the continued growth in core pawnbroking (aggregate gross lending £260m +19%, pledge book up 30%). Demand continued to gather momentum through 2023, 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.
• Trading update: The key short-term message was the challenge in retail. While volumes rose 3% 4Q’23 on 4Q’22, the value fell 3% with a shift towards lower-priced items, especially new jewellery (33% of sales value, up from 25%). Other divisions performed broadly in line with expectations and costs were controlled.
• 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 503p. 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.