Pawnbroking royalty, with strong, profitable growth

Founded in 1897, H&T is the UK’s leading pawnbroker, with 269 stores, and it has gained a strong pawnbroking market share in recent years. While it is growing ancillary gold buying and forex products, its core is pawnbroking and related retail services. As other small-sum, short-term lenders have withdrawn, H&T’s well-capitalised, low-risk proposition has unique growth opportunities, with the pledge book up over 50% in 2022. The lessening of legitimate competition at a time of heightened demand means this increasingly dominant franchise is expected to fuel strong earnings growth, with our 2024E EPS 4.2x 2021 levels. A progressive dividend follows (2024E yield 4.9%).

• Strong growth: H&T has gained pawnbroking share by opening stores and also by buying them from weaker competitors. The often claims-driven collapse of payday/home collect lenders, and H&T’s strong balance sheet, leave it well- placed to fund customers’ day-to-day living through the cost-of-living crisis.
• Limited risk: With no customer recourse, there is minimal regulatory risk. Claims management risk is limited. Lending is short-term and security good, both limiting losses. The balance sheet and product structure limit interest rate risk. Through the early 1990s and COVID-19, profits were robust.
• 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 outline later in the report, the average indicative valuation is 606p. 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.