H&T Group plc (LON:HAT) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: You called your recent piece ‘Delivering the pawnbroking growth opportunity’, what can you tell us about it?
A1: In our 15 March initiation ‘Pawnbroking royalty, with strong, profitable growth’, we highlighted that H&T Group’s core is pawnbroking and related retail services operations.
The recent interim results confirmed that H&T is delivering on the opportunities, with i) the gross pledge book lending up 22%, to £128m, and the end-period pledge book up 14%, to £115m (December 2022: £101m). Importantly, this growth was achieved across the whole customer spectrum. Retail sales were up 11%, and scrap volumes were particularly strong, with profits ahead of expectations. Foreign exchange volumes rose 19% YoY, to record levels, which bodes well for the important summer holiday season.
We raised our revenue forecasts, although they are offset by higher cost of sales, expenses and finance costs.
Q2: You highlight the growth in the pledge book as a key driver to bottom-line growth, what is driving that growth?
A2: The 1H’23 pledge book was up 14% on end-2022, which is nearly as high as our previous 17% forecast for the whole year. Net revenue rose 42%, to £32.4m (1H’22: £22.9m), with an annualised risk-adjusted margin of 60% (1H’22: 61%). The redemption rate (stable at 85%) remains above historical normal levels.
Looking at the drivers to these numbers and taking demand first, most customers use pawnbroking loans to fund day-to-day living expenses – so demand for H&T loans is growing, because the cost-of-living crisis is putting greater pressures on customer cashflows. This positive dynamic has come at a time of real constraints on the supply of short-term, small-sum credit. Some competitors have been killed by claims management companies (CMCs) – a risk to which H&T is only marginally exposed. Credit unions have moved to larger lending, and most branch-based, small-sum, short-term lenders have closed. H&T has also been growing its market share of pawnbroking.
At a time of growing demand, H&T’s long-term, competitive, positive position has never been stronger.
Q3: Your note emphasises that, for the Group, pawnbroking is a low-risk form of financing, why is that?
A3: There are a number of factors making this a low-risk form of financing. It has relatively low loan to value – 65% in H&T’s case using conservative valuation assumptions. The assets are directly under H&T’s control at all times. H&T does not suffer the risk of the asset being allowed to deteriorate from poor maintenance or theft. The assets are readily marketable, with jewellery, for example, having a gold-backed inherent value, based off its scrap value. Advances are short-term debt, meaning that risk is limited. The customers own the asset being pledged and against which H&T is lending.
Our note goes into further detail on their own further risk mitigation practices, including lending assessment and controls.
Q4: I see the Group is Britain’s sixth-biggest jewellery retailer, how did it perform there?
A4: H&T offers a range of pre-owned and new items; 82% and 18% of 1H’23 sales, respectively.
Some of the key developments in their retail offering in 1H’23 were double-digit sales growth, a fall in margins with an increase in pre-owned, high-end watches (which are lower-margin), together with dynamic pricing and inventory management to reduce an unexpectedly large holding of certain high-value watch brands. They are already back to historical levels. Online sales account for 23% of the total (1H’22: 14%) and were up 79% on 1H’22.
Q5: Can you say a few words on the other businesses?
A5: Purchasing scrap contributed net revenue of £4.2m (1H’22: £2.8m) on sales of £21.8m (1H’22: £15.1m). The gross value of pawnbroking scrap sales to June 2023 was £14.6m (1H’22: £7.1m), with a gross margin of £2.6m (1H’22: £1.4m). Foreign currency transaction volumes are at record levels, and increased 19% YoY, with net income up 12%, to £2.9m (1H’22: £2.6m). Our note gives more details on each of these businesses.
Q6: And finally, what about the risks?
A6: H&T Group’s customers are cash constrained. Their business risk from money laundering and stolen goods is above average, but our detailed review of their controls shows them to be good.
We believe sentiment to the industry is a specific risk, and the Group has 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 the initiation report explaining our view that the Group is low risk.