Pawnbroking: the global perspective for H&T

In this note, we put pawnbroking into a global and historical context: i) the global market is large, ca.$40bn, UK just ca.5%; ii) pawnbroking is widely adopted across a range of cultures/geographies from China, India, Islamic countries to US, Europe and UK; iii) many UK immigrants are comfortable with pawnbroking from experiences in their country of origin; iv) the largest listed pawnbrokers trade at over 2x the PER rating of H&T with similar forward earnings growth; iv) it is generally a regulated business with largely favourable regulators’ comments, as in the UK. Pawnbroking has been available globally for centuries, debunking the misconception some have of it as a UK Dickensian practice.

• Global business relevance to H&T: In business terms, the key factor is that many UK immigrants are familiar with pawnbroking services creating a new customer base. Some estimate that nearly a fifth of all owned gold in India is pledged. 1.5m Poles are estimated to have used the service. The Philippines has 16,000+ pawn shops.
• Global valuation relevance to H&T: By investing in H&T, international investors who like pawnbroking can diversify their exposure by geography, at relatively low multiples. The largest listed peers trade at wide P/E and P/BV premiums to H&T, opening the door to trade and private-equity-backed corporate activity.
• 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, a 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. Our forecasts are unchanged for the recent “in-line” trading statement.