# 1pm plc Q&A with Hardman & Co Analyst Mark Thomas (LON:OPM)

- Link: https://www.directorstalkinterviews.com/1pm-plc-qa-with-hardman-co-analyst-mark-thomas-lonopm/412766128
- Published: 2019-02-01T09:59:55+00:00
- Author: Amilia Stone

**1pm plc** ([LON:OPM](https://www.directorstalkinterviews.com/company/time-finance-plc/time.l))
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.

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