1pm Plc (LON:OPM), We had been looking for two key themes with the 1H FY’19 results: i) that any early signs of credit deterioration were modest; and ii) that the integrations were going well. 1pm delivered on both. On credit, the net bad debt write-off was down on last year. Management detailed the diversification of the business, and commented how its operating flexibility, small individual exposures, human underwriting and fixed-rate lending should limit losses in a downturn. On group synergies, we note cross referrals are ticking up each month and the cost of group funds is falling. 1H FY’19 saw good franchise and revenue growth. The valuation appears anomalous with the group’s prospects.
1H FY’19 results: New business origination was up 10%, and revenue rose 15%. With cost of sales (including bad debts) increasing more slowly than revenue, gross profit was up 17%. Central control investment saw expenses rise 20%, and profit before tax was up 11%. Cost of funds continues to fall.
Outlook: These results were consistent with our FY’19 estimates, which are unchanged. Management outlined aggressive new targets for 2023, with a lending /invoice finance book of £350m (2018: £145m, 2014: £19m) and £90m+ of revenue (2018: £30m, 2014: £4m). It also outlined its strategy to achieve these targets, implying significantly more of the same, with selective acquisitions.
Valuation: We detailed the assumptions in our valuation approaches in our initiation note, Financing powerhouse: A lunchtime treat. The GGM indicates 116p and the DDM 69p (DDM normal pay-out 77p). The 2020E P/E (5.1x) and P/B (0.7x) appear an anomaly with 1pm’s profitability, growth and downside risk.
Risks: Credit risk is a key factor and is managed by each business unit according to its own specific characteristics, with a group overview of controls including the very recent appointment of a Group Head of Risk. Funding is widely diversified, and at least matches the duration of lending. Acquisitions would appear well priced, and delivery of synergies provides earnings upside.
Investment summary: 1pm offers strong earnings growth, in an attractive market, where management is tightly controlling risk. Targets to more than double the market capitalisation appear credible, with triggers to a re-rating being both fundamental (delivery of earnings growth, proof of cross-selling) and sentiment-driven (payback for management actively engaging the investor community). Profitable, growing companies generally trade well above NAV.
