H&T Group plc (LON:HAT) is the topic of conversation when Hardman & Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: You called your recent piece ‘Pawnbroking: the global perspective for H&T’, what can you tell us about it?
A1: In this note, we put pawnbroking into perspective: 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 Group 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.
Q2: Pawnbroking is surely a very local business as you need to know and understand your customers and the assets they pledge. What is the business relevance of the global market to the group?
A2: You are absolutely spot on. Knowing your customer is key to any financing business.
In business terms, the key factor looking globally is that many UK immigrants are familiar with pawnbroking services and this creates a natural customer base for the group’s perspective.
Some estimate that nearly a fifth of all owned gold in India is pledged, a staggering 5,300 tonnes of it. 1.5m Poles are estimated to have used the service and pawnbroking is present in all the major European countries (the size of the German market is bigger than the UK). The Philippines has 16,000+ pawn shops while the US has 11,000.
We believe that some have a mistaken view that pawnbroking is a UK business rooted in a Dickensian exploitation of the poor, nothing could be further from the truth. It started in China 3,000 years ago, was used by Medieval kings to finance wars and today is adopted in cultures ranging from the US, across Europe to China to Islamic ones.
Q3: What valuation and investment conclusion did you draw?
A3: The groupis one of the lowest-rated pawnbrokers globally, using price-to-earnings as the metric.
UK small caps, generally, are out of favour, but international investors who like pawnbroking are able to diversify their exposure by geography at relatively low multiples. The largest listed peers, FirstCash in the US and Muthoot Finance in India, trade at significant premiums to H&T. This opens the door to corporate activity. We also note that, in the US, Speedy Cash is owned by the PE house, Insignia Capital Group.
For many PE-backed businesses, buy and build is a core option for value creation and this has become increasingly so in a period of higher rates.
Q4: Finally, what about the risks?
A4: H&T Group’s customers are cash constrained. The group’s business risk from money laundering and stolen goods is above average, but our detailed review of the company’s controls shows them to be good.
We believe sentiment to the industry is a specific risk, and they have a strong, ongoing communication programme to address what are often outdated or simply incorrect assumptions.
Inflation risk to the cost base is also a specific, short-term consideration. We have a whole section in our initiation report explaining our view that H&T is low risk.
