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1pm Q&A: Still cash generative and still profitable despite COVID-19 (LON:OPM)

1pm plc (LON:OPM) Chief Executive Officer Ian Smith caught up with DirectorsTalk for an exclusive interview to discuss what the company does, impact from COVID-19, trading in Q1 of the new financial year, the UK SME sector and the company’s strategy and longer term plans.

Q1: Can you remind us what 1pm is and what the Group does?

A1: So, the name is derived from one payment monthly which gives you a clue that we’re in the financial services sector, we describe ourselves as a non-bank specialist finance provider to UK SME’s.

The trading subsidiaries that are within our group that deal with regulated business are all FCA authorised and we describe ourselves as operating a hybrid model which means that we lend our own balance sheet, providing finance, at our risk if you like, to UK SMEs, but we also broke business onto other funders where deals don’t meet our credit criteria or indeed where the finances for consumers.

We deliberately set our stall out to be multiproduct so we provide what we think are all the main products that UK SME’s require, the main finance products – asset finance, invoice finance, loans, and vehicles.

In the results that we’ve announced this morning, we’re lending £123 million at present to the UK SME sector through those products. We have £55 million of net assets on the balance sheet, we’re dealing with about 20,000 customers around the UK with 179 employees and six office sites in the UK.

Q2: Now you mentioned UK SMEs, I presume many of your customers have been adversely impacted by COVID-19. How is the situation affected the business?

A2: So, the fourth quarter of the financial year obviously is when the impact of the COVID-19 was felt and many of our customers have suffered with much reduced footfall and therefore turnover and lower cash inflow. The way that’s manifested itself for us is that we’ve had multiple requests from those customers for forbearance, which really means some form of payment holiday over a period of one, two or three months, for example.

To bring you up to date with the, the data on that as that 31st of August, we had 1,244 requests from customers for forbearance so around 9% of our customers by number who are currently borrowing from us. In value terms, that represents about £30 million of our portfolio which is around 30% of our overall portfolio under some form of forbearance and that’s very consistent with others in the lending industry in the UK at present.

But we decided very early on in the COVID-19 process that it would be the right and proper thing to do to provide that that that kind of forbearance to our customers to grant them the support that they require and we’ve been delighted to do that. With the strength of our balance sheet and with our capital reserves, we’ve been able to provide that forbearance and to grant that support without having to go back to our funders and ask for a similar level of forbearance for them.

So, we’ve been able to provide that through the strength of our financial position which we’ve been proud to do.

Q3: Now, in terms of COVID-19 more generally, how has the company managed the impact of the pandemic? Have you been able to continue lending?

A3: Yes, we have. So, right at the start of the pandemic, we went into crisis management mode, if you like, to deal with this and had an incident management team formed.

We set out four guiding principles to start with:

  • The first was to ensure the health and safety of our employees.
  • The second was to have an uninterrupted, seamless service even though we were remote working.
  • The third, as I just mentioned, was to provide forbearance to our existing customers.
  • Fourthly, and probably most importantly, we decided that we wanted to stay open for new business and for new lending to credit worthy SMEs and we’ve been able to do that.

The important point is that we have very strong support from our funding partners, as I mentioned, we’re haven’t had to ask them for forbearance and very early on, we decided to take advantage of the government support schemes we became an accredited lender under the government’s Coronavirus Business Interruption Loan Scheme, CBILS as it’s known. We’ve been able to originate new business by being an accredited partner under that scheme.

So, yes, we have been able to continue lending, and I think that’s been crucial to ensure that we’re in a strong position as we trade through the impact of COVID-19.

Q4: To what extent have the results for the year announced reflected the effects of COVID-19 and can you tell us more about the results?

A4:  So, the first three courses of the financial year, we were trading in line with market expectations and of course, it was all in the fourth quarter of our financial year that the COVID-19 impact occurred and like many other companies, we therefore withdrew market guidance. So, it has been a COVID-impacted set of financial results.

Taking that into account, the results for the year as a whole were, we thought, very satisfactory, we’ve been profitable throughout, we’ve generated cash throughout and, as I’ve mentioned before, we’re in a pretty strong balance sheet position.

So, for the year as a whole, we originated £147 million of new deals, that’s down about 9% on the previous financial year, but because of the impact of COVID-19. Our revenue is £29.2 million similarly down about 8% or 9%. Our profit before tax and exceptional items was £3 million pounds and that was substantially lower than last year’s result of £8.1 million and that’s because of two things.

Firstly, the impact of COVID-19 in the fourth quarter with reduced revenues and therefore reduced profits but also secondly, we’ve put in place a one off impairment charge of £2.1 million in the fourth quarter of our financial year and that was really just to ensure that we have enough cover in terms of our bad debt provision for the potential impairment that may come further down the line and this new current financial year.

There is a lot of uncertainty around as to how the economy is going to perform and what’s that’s going to do in terms of the recoverability of our receivable and we felt it was the right and proper and prudent thing to do to make sure we have enough provision in the balance sheet. So that’s what’s caused a profit of £3 million opposed to sort of £8 million in the prior year but as I say that the correct thing to do.

We’re still profitable, our operating expenses were reduced, importantly we have £174 million worth of funding facilities at the year end and that’s increased year-on-year signalling the support that we have from our funders.

I think overall, as I say, a satisfactory set of results, still cash generative and still profitable despite COVID-19.

Q5: And the year end was the 31st of May, do you have a trading update for the first quarter of the current financial year?

A5: Yes, we do. So, we are very encouraged by the trading in the first three months of the new financial year, it’s steadily been increasing month on month since the low point of April. As I mentioned, we have no guidance in the marketplace in relation to this year’s profitability but we do obviously have our internal operating budgets and we’ve beaten those budgets in the first three months of the year so we’re quietly optimistic about the current financial year.

Certain sectors, even within the COVID-19 impact, are performing very well – distribution, medical health care etc. and there’s probably less competition around in the market for us in that there are some lenders who are not yet back to lending for new business in the marketplace. So, we’re benefiting from that and, as I mentioned, we’re also benefiting from being a funding partner under the CBIL scheme.

So, the first three months of the new financial year, trading has been encouraging, it’s been better than we thought in terms of our budget and therefore we’re cautiously optimistic about this current financial year.

Q6: So, how do you see trading evolving over the rest of the current financial year and how do you see the UK SME sector fairing?

A6: Well, it’s interesting. I think the SME sector is pretty resilient, in the last few weeks we’ve seen a large number of new companies being formed, in fact, in certain parts of the UK trading is getting back to pre-COVID levels so seaside towns and market towns, the high streets are busier than perhaps the inner cities are.

So in certain geographies, in certain sectors, trading is beginning to improve but of course there are some significant uncertainties around what may happen with further lockdowns and what may happen if and when the government support schemes come to an end, like the furlough scheme and bounce back loans and CBILS. So, if we’re all honest, I think we can only have a one or two months real visibility going forward.

I’m encouraged that historically the SME sector has been pretty resilient and, as I say, we’re seeing good signs of trading activity now but it’s clearly a mixed and uncertain picture.

Q7: 2020 has obviously been an unusual year, how does this affect 1pm’s strategy and longer term plans?

A7: Well, I think the strategy probably stays the same as it has been for some time, our intention is to continue to build scale in all of the products that we provide and that will be through organic growth as we take more market share and potentially through acquisitive growth as and when circumstances and conditions allow.

Clearly, right now we’re in capital preservation mode so we’re not looking at acquisitive activity but I think we will continue to try and scale the business, we want to continue to reduce that cost of borrowings, we prefer to lend more on our own balance sheet.

We will invest further in our branding, we are looking at becoming one brand as opposed to a collection of different companies, we will be introducing selected new products as time goes on and we’re innovating in terms of technology, we are hiring in terms of new skills and new talent and delivering operational synergies through becoming, as I say, a group rather than a collection of companies.

Our strategy really is unchanged, it’s interrupted in terms of timescale but I feel as though that we should continue on the same strategic path. Fundamentally, we have a strong balance sheet, ample funding facilities, we’re generating profits and generating growth so no need to change our strategy at this point.

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