1pm plc (LON:OPM) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: 1pm, they recently had their interim results, what for you were the key takeaways?
A1: Well, we’ve been looking for two key themes with the interim results. Firstly, that any signs of credit deterioration were modest and secondly, that the integrations of the deals they did last year were going well and they’ve delivered on both.
On credit, the net bad debt write-offs were actually down on last year, management also detailed how the diversification of the business, commented on its operating flexibility and small individual exposures, human underwriting and fixed-rate lending should all limit losses in a downturn. So, the message on credit was really quite good.
On group synergies, we note cross referrals are ticking up each month and the cost of group funds is falling as well.
The interim results saw a good franchise and revenue growth.
Q2: Can we just dig into the detail a little bit more? What did the numbers look like?
A2: The new business origination was up 10% and revenue rose 15%, partly helped by the prior period lending. Cost of sales, including bad debts, increased slower than revenue so gross profit was up 17%. The company continues to invest in central controls, particularly in the risk area and that includes the new Head of Risk and this saw expenses rise 20%. The cost of funds continue to fall, as I mentioned earlier, the enlarged group benefiting from being a better credit than the historical, much smaller and more focused business. So, bottom line, the profit was up 11%.
Q3: Does that change the outlook in any way at all?
A3: No, in the near-term, these results were very consistent with our full year estimates, so those forecasts are unchanged. It remains a business showing good franchise growth and financial returns growing.
What is new is that the management actually outlined aggressive new targets for 2023. They’re looking at a lending and invoice finance book of £350 million compared with £145 million last year and just £19 million in 2014. That type of book growth would then see very strong revenue growth with management indicating £90 million plus of revenue in 2023 against the £30 million we saw last year and £4 million in 2014.
These plans are not just not just pie in the sky, what they also did was outlined the strategy to get there, to achieve these targets, implying significantly more of the same, supplemented by selective acquisitions.
In our view, from what we can see on these results and on these plans, organic growth would be between one third and a half of the total growth to meet these aggressive targets.
Q4: I can see why credit is a key issue for any lender really, particularly in these uncertain times. Can you give us some more colour on that?
A4: You’re absolutely right, credit is critical and what’s important is that the company appears to be well positioned for any downturn. The results showed it has continued to shrink its highest risk lending and grow the lowest risk, especially in invoice finance. It has a hugely diversified portfolio; the top ten sectors are just a quarter of the book, individual exposures are kept small, which, as we detail in our note, helps collection rates.
The company has increased the business brokered on rather than kept on balance sheet and being able to broke as well as lend is a key business model advantage. There is human underwriting so the book can be positioned for expected developments and not simply rely on historical data when deciding to make a loan or not.
We also believe they will be able to see increased spreads and more demand as mainstream lenders typically reduce their appetite to lend in any downturn. We detailed our sensitivity analysis which takes an extreme scenario before 2020 earnings per share were to actually be below the 2017 level.
Q5: Finally, can you comment on 1pm’s valuation?
A5: If our forecasts are correct, they are trading on a price to adjusted earnings of just 5 times in 2010, it will also be priced at 0.7 times net asset value and have a yield of 2.4% but with a dividend cover of 8 times, that’s actually quite a very comfortable yield. Such a valuation appears an anomaly with the group’s growth and profitability outlook implied by the forecasts.
In our notes, we’ve outlined a number of valuation models for investors to consider, they are, of course, based on our assumptions but the average of these valuation approaches is just over 90p. Whilst there are no direct peers, if we look at what might be regarded as near peers, their PE ratings and valuations are significantly above 1pm’s.