Cash and Carry

11/04/2008 12:01 am EST

Focus: GLOBAL

John Snowden

Contributor, The IRS Report

John Snowden, editor of The IRS Report, finds potential in an age-old cash business.

H & T Group (LSE: HAT) was established in 1897 when the declining English gentry were loath to carry money and often used [the group’s] services to pay gambling and household bills.

In the 1990s, with 27 stores, H&T was bought by Cash America. They introduced check cashing and payday advance services. In 2001 the UK business was re-branded to make the outlets more appealing to the public.

Three years later, current chief executive officer John Nichols (with a management team and backed by Rutland Partners) bought the company from Cash America and has since implemented a number of new strategies to improve performance.

In May 2006, H&T was admitted to AIM (the London Stock Exchange’s international market for smaller, growing companies—Editor), capitalizing the company at £54 million. It sold another 3.6 million shares a year later, raising a further £7 million.

Today, H&T is the largest pawnbroker in Britain by size of the pledge book (the items that have been pawned—Editor). The company has opened four new stores this year, bringing the total to 95.

Trading for the first half of the year has been buoyant, with pretax profit rising 53.5% to £7.1 million, operating profits up 60.8%, and gross profit up 33%. Basic earnings per share were up 25% to 8.94p and the pledge book rose 14% to £29.1m. The interim dividend is increased from 1.6p to 2p per share.

An average customer borrows £120, secured by gold or diamond jewelry. About 60% are repeat customers and around two-thirds do not have bank accounts.

Management was cautious about the impact of the current retail climate on Christmas trades, with John Nichols—somewhat surprisingly—adding that the weaker economic climate was not necessarily a driver to the business.
 
Pawnbroking is not a cyclical business. I believe that we in the UK are on the brink of recession and that the financial sector will be the first to experience it. Many among the newly unemployed will raise cash on objects acquired during the good times rather than risk credit rejection by their bank managers.

Either way, H&T remains on the growth track with good management, the number of stores in operation exceeding 100 by the end of the financial year, and estimated profits of £10 million this year and £10.75 million for 2009. A P/E of 8.4x falling to 8.2x makes the shares good value. (It closed at $157.50 Tuesday—Editor.)

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