Core franchise build, short-term retail noise

In our 15 March 2023 initiation, 'Pawnbroking royalty, with strong, profitable growth', and subsequent 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. These results reconfirmed both, with the pledge book up 28% and net pawnbroking revenue up 36%. 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 Christmas 2023. Forex profits grew 11%, again helped by H&T’s unique franchise. While there are government-driven and inflationary pressures on costs, 2023 expenses were below our forecast, evidencing good cost control.

• Core pawnbroking: For us, the key long-term investment message was the continued growth in core pawnbroking (aggregate gross lending £260m +19%, pledge book up 28%). Demand continued to gather momentum throughout 2023, at a time of reduced market supply. We believe H&T’s strong balance sheet, ongoing investment in its stores and economies of scale mean it is well-placed to seize opportunities.
• Other divisions: Retail sales rose 8%, but profits were down 19%, with margin pressure reflecting i) customers choosing lower-priced, lower-margin items (high-margin, pre-owned jewellery 50% of sales vs. 62% in 2022) and ii) watch stock clearance. Other divisions performed broadly in line with expectations.
• 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 528p. As H&T is a growing business, there is upside potential from 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 2024, there is further growth in customer demand from the cost-of-living crisis, with few alternative regulated competitors.

Read the DirectorsTalk Interview transcript.