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: Mark, why is the SME market attractive to a company like 1pm?
A1: Well, the number of small and medium enterprises (SME’s) in 1pm’s target market is growing steadily, about 2% or 3%per year so that’s a nice steady underlying growth. Much more critically, the company, after its various acquisitions, is very well positioned to take considerable market share from a very low base, it’s currently about 0.1%. The banks, by far the largest players, have been shrinking their lending and government initiatives are very favourable for a challenger like 1pm. The business is profitable and it’s a growth market.
Q2: What are they doing to grow faster than this attractive market?
A2: It has a number of specific growth features, first of all it focusses in niche areas and by managing each product brand, separately and carefully, it can deliver better service to that specific customer base, that in turn attracts more business. Also, following the more recent acquisitions, there are significant opportunities to cross sell, reduce funding costs and get some central efficiencies. We expect strong organic growth with better funding, more brokers distribution and synergies from the deals.
Q3: The company has been very acquisitive recently, how can you be sure that they’ve paid the right price, know what they have bought and they’ll integrate it well?
A3: Companies whose strategies requires acquisitions have not rewarded shareholders well. However, if you make carefully targeted acquisitions at the right price which strategically enhance the business, they certainly can add value. When we look at 1pm, we believe it falls into that category. In terms of price, we estimate a forward, post-synergy PE on the deals of 6 times, very very low.
Each of the businesses was reviewed by an experienced manager in that business area through the due diligence process, they could really get in to kick the tyres and really know what they were buying. It’s also on the integration worth noting that they are leaving the brands and front offices to run separately, that’s a low risk approach, it doesn’t break the business model but at the same time it’s going to take out some of the back-office costs and functions like Human Resources and IT. So, in the riskier elements, in terms of the front office, it’s being run as it was and in the areas where you can effectively take out cost, it has taken the cost out.
So, overall, the price looks good, 6 times, there’s real due diligence by experience managers and the right approach to integration.
Q4: Across the market, there are growing concerns about credit risk, how does 1pm plc manage its losses?
A4: Credit risk is a feature, it’s certainly a concern for a number of investors. For 1pm, it’s managed primarily within each business unit because each business unit has a different risk dynamic by its customer base and its product. For example, with invoice financing, you actually have an exposure to your customer but also to the invoice payer.
Now, we think it is eminently sensible to have risk in each of the business units and that the processes adopted by the group reflect the extensive experience as a lender in each of those areas. Compared with mainstream lending, we do believe the loan and lease book within the company is a slighter higher than average loss, the current losses are nearly 3 times mainstream banks, that’s 66 basis points higher. The yield more than compensates for that, the yield is nearly 10and higher.
If we look at the other half of the business which is invoice financing, Generr8 and Positive Cashflow combined, had less than £200,000 of losses over 10 years when their annual revenue is nearly £7 million. So, half the business, the invoice financing, is incredibly low risk, the other half is above average risk but it’s compensated for by the yield.
Q5: Financing companies often run into trouble with getting their own funding, how does the company manage that risk?
A5: Funding risk is best managed by having, first of all, access to multiple sources of funding, secondly, making sure that you’re funding at least matches your loan duration and thirdly, ensuring that the facilities you have are committed. The company has done all three of that so it has a whole series of different sources of funding, not reliant on a single bank for example. As a larger, more diversified group, we would expect the funding to be reviewed and net cost to fall and terms improved but overall, those basic principles of diversified sources, at least matching lending, long term commitment, we expect all of those to continue.
Q6: 1pm plc is trading on a prospective PE of 6.5 times and well below its limited peer group, what triggers do you see for a re-rating?
A6: Over the next couple of years, we actually see a number of triggers, some of which are fundamental and earnings-driven and some of which are sentiment-driven so both an earnings uplift but also a higher rating.
Management maintaining their dividend in the recent results at 0.5p, despite the big increase in the share issue after the period-end, is actually a real sign of confidence which can give investors a good feeling in terms of the earnings going forward.
Our earnings growth, the forecast, is primarily driven by adding the acquired company’s earnings to what 1pm had, it’s not a pie in the sky kind of growth, it’s simply delivering what we know is there.
Assuming the company does that, which I’m very confident it will do, it proves that the model works and it proves management credibility. This will be re-enforced over time, as we get various announcements with results crystallising potential group synergies so, both in terms of costs savings but also a re-financing of debt, or a new funding partnership, so anything that re-enforces again that the acquisitions have been well made is good for sentiment. The third thing is that management is very pro-actively going out, engaging with shareholders, engaging with investors and potential investors so the message about the business model and its opportunities get the widest possible reach.
We see in that a solid earnings growth, solid delivery, combined with a re-rating as people actually recognise that that growth is real.