Pawnbroking’s current appeal

In our 15 March initiation, Pawnbroking royalty, with strong, profitable growth, we highlighted that H&T’s core is pawnbroking and related retail services operations. As other small-sum, short-term lenders have withdrawn at a time of heightened demand, H&T’s well-capitalised, low-risk proposition has unique growth opportunities, which are expected to fuel strong earnings growth (2024E EPS 4.2x 2021 levels). We also note that the dividend is progressive (2024E yield 5.3%). H&T’s AGM trading statement on 10 May confirmed our positive expectations. In this note, we focus on the reduction in competition at a time of heightened demand and the low-risk nature of H&T’s pawnbroking business.

• Strong growth: The pawnbroking pledge book saw strong growth, rising to
  ca.£106.5m at the end of April, from £100.7m at 31 December 2022), despite recent above-normal redemptions (expected to have short-term impact), as some customers wanted their jewellery for Coronation events. Despite this drag, the growth is in line with our full-year forecast.
• Other businesses: Retail sales (to end-April) were up 13% YoY. Margins have continued to moderate, as expected, primarily because of mix. Forex revenues are up 10% YoY. Gold purchase volumes have been in line with forecasts. Scrap margins continue to benefit from a strong gold price.
• 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 detailed in the initiation, 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.