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 ‘Core franchise build, short-term retail noise’, what can you tell us about it?
A1: In our 15 March 2023 initiation, ‘Pawnbroking royalty, with strong, profitable growth’, and subsequent notes, we highlighted the strong market for pawnbroking and why H&T Group, as the market leader, is uniquely placed to take advantage of these opportunities. These results reconfirmed both, with the pledge book up 28% and net pawnbroking revenue up 36%.
Like many in the retail space, the company faced the challenge of customers focusing on lower-value, lower-margin items in the key run-up to Xmas 2023. Forex profits grew 11%, again helped by the group’s unique franchise.
While there are government-driven and inflationary pressures on costs, 2023 expenses were below our forecast, evidencing good cost control.
Q2: You highlight the growth in the pledge book as a key driver to bottom-line growth, what is driving that performance?
A2: The 2023 pledge book was up 28% on end-2022, which is nearly twice our original 17% forecast for the year. Importantly, demand continued to gather momentum through 2023, at a time of reduced market supply. We believe their strong balance sheet, continued investment in its stores and economies of scale mean it is well-placed to seize opportunities.
Looking at the drivers, most customers use pawnbroking loans to fund day-to-day living expenses, so demand for the group’s 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 the company is only marginally exposed. Credit unions have moved to larger lending, and most branch-based, small-sum, short-term lenders have closed.
The group has also been growing its market share of pawnbroking. At a time of growing demand, their long-term, competitive, positive position has never been stronger. In our note, we explore how pawnbroking growth should feed through, with a time lag, to other divisions.
Q3: What about the short-term challenge in retail?
A3: Retail sales increased 8%, to £48.6 million – 2022: £45.1m – with online originated sales at record levels and representing 20% – 2022: 13% – of total sales value. While overall sales grew, the retail margins reduced, as expected, to 30%, in 2022, they were 39%, as, through the year, customers displayed caution in their spending, with a significant shift in the sales mix towards lower-priced, lower-margin items, especially in the important pre-Christmas period.
Importantly, the company has much more flexibility to address this issue, because it is a low-price model and can flex which non-redeemed pawn assets to scrap. By way of example, it grew customer numbers in the fourth quarter. Margins were also impacted because, in 1H’23, the group chose to prioritise stock turnover, particularly of some high-value watch brands.
Q4: And the pressure from costs?
A4: The government-driven National Living Wage, minimum wage, does not help, but, as a I mentioned earlier, the group’s costs came in below our 2023 estimates, evidencing good control ahead of this pressure.
Q5: Finally, what about the risks?
A5: 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 the company’s 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 our initiation report explaining our view that the group is low risk.
