Tip of the year 1 (of 7) – Buy S&U at 915.25p

 Over the next seven days I shall serve up seven tips for 2013. There should be something for everyone. In assembling this magnificent seven I start with company fundamentals and price. But I also take into account my macro-economic assumptions for the next 12 months. And, I am sorry to say, that I am not terribly cheery. I do not see UK GDP growing rapidly. Credit will be hard to obtain and consumer spending will not be strong. As such there is some merit in starting with a solid defensive play and that brings me to fully listed S&U (SUS) at a share price of 915.25p.

As a reminder, my rather grim macro predictions for 2013 can be found here and were published on Boxing Day.

S&U is a tip from my Nifty Fifty website (at an 839.5p offer price) and I also recommended the stock on t1ps.com several years ago since when folks will (with dividends) have more than doubled their money. And it is the strong dividend stream and attractive yield which makes this a solid defensive play.  The company provides home credit and motor finance throughout England, Wales and Scotland and has shown itself not only resilient to the current economic environment but able to continue to grow through it. That trading pattern will continue during 2013.

The company generates its income from the provision of home credit and motor finance. The former provides small loans on a door-to-door basis for poor folk on council estates. The sums are small and the interest payable is steep but not usurious. There is usually a very long standing relationship between collectors and repeat customers and hence bad debts tend to be low. The motor finance model is similar – S&U’s customers are not buying Porsches. This is a company whose customers are entirely from the social classes C, D and viewers of the Jeremy Kyle show.

This is a family run business with the Coombs family owning more than half the shares and with Anthony Coombs (a former Tory MP pictured above who is delightfully right wing and as far as I can see agrees with David Cameron on more or less nothing) now at the helm.  The family seems a rather fractious bunch but they are agreed on one thing: the need to maintain a progressive dividend policy. Heck, they own 56% of the shares so who can blame them?

Results for the company’s half year ended 31st July 2012 showed a 13.7% increase in pre-tax profit to £7.32 million, on the back of revenue 8.2% higher at £26.79 million. Earnings per share increased by 18.2% to 47.12p and the interim dividend was increased by just over 9% to 12p per share. The profit performance meant that despite £3.53 million paid out in dividends and a £2.51 million increase in amounts receivable from customers (mainly due to planned extra investment in the receivables of the growing motor finance business and against just a £374,000 increase in trade & other payables), net debt fell by £112,000 during the period, to end at £19.13 million. Net (tangible) assets increased by £2.14 million to £57.01 million.

The growth was mainly driven by the motor finance business – which delivered a 28.9% increase in pre-tax profit (to £3.76 million) on revenue growth of 14.2% (to £9.96 million). The home credit business nudged its pre-tax profit up to £3.56 million (from £3.52 million) on revenue 4.9% higher at £16.83 million. The former reported customer numbers an eighth higher than the prior year, with both margins and debt quality rising – including a record 88% of live receivables up to date as at the period end (from 84% a year earlier). The home credit business had slightly higher debt provisioning than the very low levels in the first half of the prior year and together with operating in a market where customer appetite and responsible lending have restricted receivables growth, its performance was solid. For the group as a whole, collections were up 8%, receivables up 6% and impairment charges reduced by 1%.

The company is comfortably operating within its banking facilities and is a proven prodigious generator of cash, but both of these clearly rely on repayments by customers. The company has credit control policies supported by ongoing reviews for impairment – and a strong track record reassures in this regard over many, many years. My guess is that if S&U customers start to default then the economy really has gone to hell in a handcart.

In a weak consumer climate – as we will see in 2013 – it is unlikely that demand for loans will sprint ahead. But folks still need to pay for their sky subscriptions and new sneakers for the kids. S&U customers are largely repeat customers. They just keep coming back, repaying and then coming back again.

I have not amended my forecasts for some months – a 6^th December trading statement showed that S&U was very much on track to beat my numbers. I suspect that my forecasts will be exceeded marginally but pro tem I leave numbers for the year to January 31^st 2013 unchanged and also those for 2014 but I would hope to increase the latter (marginally) in April when 2013 prelims are released.

For the year just drawing to a close I expect S&U to report a pre-tax profit of £13.5 million, generating earnings per share of more than 86p (up from 76.11p last year). Next year £14.5 million and approaching 91.5p in earnings per share are anticipated. The dividend is expected to rise from 41p per share last year, to 44p this and 46p next year. For a company which should be resilient to the current environment (“in uncertain times, both our home credit and motor finance businesses give our customers the reliable, responsible, convenient and flexible finance they require”) and has shown itself able to continue to grow despite a less than cheerful economic back drop, I would argue a yield of 4% more than sufficient – suggesting an initial target price of £11.50 per share. On an earnings basis, this equates to a price-earnings multiple of little more than 12.5 times – which is hardly demanding given the company’s resilient, growth profile.

The spread on this stock is horrible. That always deters folk but you just have to buy and bite the bullet. At today’s 940p offer price I would assume that during the next 12 months you will pick up dividends of 45p plus a capital gain of 210p making a total return of 255p or 27%. That is not a bad gain, this stock can go in an ISA now and on a 4.9% January 2014 yield (at 940p) the downside is very limited indeed.

I shall continue my tips of the year series tomorrow with a mining play. 6 of my seven tips of the year will appear on various websites and you can alerts to all of those tips (plus on all the other articles I write) by following me on twitter @tomwinnifrith. The 7^th tip of the year will be sent out by email on January 2^nd on the launch day of the new onefreesharetip.com – to receive that tip and a free share tip from a panel of 20 top tipsters each day of the working week sign up NOW at onefreesharetip.com