Interim results: delivering value-added strategy

The results confirm 1pm is on track to deliver the substantial profit growth the market expects. We believe greater confidence in delivery will be a trigger for re-rating as the current May 2019E P/E of 6.5x and P/B of 0.8x are inconsistent with a profitable, growing company. The results also confirm impairment losses, although rising modestly, remain well controlled and more than priced into lending, and that provisions coverage is increasing. Funding continues to be well diversified and the average cost of funds is down nearly a third. We expect the second half to show a continuation of these trends, together with more integration benefits.

• Strategy: After recent acquisitions, 1pm can provide all the major SME financing products through all the distribution channels. It is optimising discrete business brands with appropriate central efficiency, and the balance between broked and on-book loans. 1pm tightly controls credit, funding and customer behaviour risk.
• Attractive market and market position: We see a huge opportunity to take share (current level ca.0.1%) in a market showing consistent growth. The group’s above-average risk is more than compensated for in a higher yield. 1pm is already delivering low-teen RoE, and we expect this to increase.
• Valuation: We detail the assumptions in dividend discount and Gordon Growth models later. The average indicates an end-2018 value of ca.88p (GGM 103p, DDM 73p, DDM normal pay-out 81p). The current 2019E PE of 6.5x and P/B of 0.8x appear highly inconsistent with the group’s profitability and growth.
• Risks: Credit risk is a key factor and is managed by each business unit according to its own specific characteristics, with a group overview of controls. Funding is widely diversified and at least matches the duration of lending. Acquisitions would appear well priced and delivery of synergies provides earnings upside.
• Investment summary: 1pm offers strong earnings growth, in an attractive market, where management is tightly controlling risk. Targets to more than double the market capitalisation appear credible, with triggers to a re-rating being both fundamental (delivery of earnings growth, proof of cross-selling) and sentiment-driven (payback for management actively engaging the investor community). A profitable, growing company should trade well above NAV.