# H&T Group long-term, competitive, positive position has never been stronger (LON:HAT)

- Link: https://www.directorstalkinterviews.com/ht-group-long-term-competitive-positive-position-has-never-been-stronger-lonhat/4121112283
- Published: 2023-03-28T08:10:00+01:00
- Author: Amilia Stone

**H&T Group plc (LON:HAT) **is the topic of conversation when **Hardman and Co**’
s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.

**Q1: You called your recent piece ‘Pawnbroking royalty, with strong, profitable
growth’, what can you tell us about it?**

**A1: **Founded in 1897, H&T Group is the UK’s leading pawnbroker, with 269 stores,
and it has gained a strong pawnbroking market share in recent years. While it is
growing ancillary gold buying and forex products, its core is pawnbroking and related
retail services.

As other small-sum, short-term finance providers have withdrawn, the company’s well-
capitalised, low-risk proposition has unique growth opportunities, with the pledge
book up over 50% in 2022.

The lessening of legitimate competition at a time of heightened demand means this
increasingly dominant franchise is expected to fuel strong earnings growth, with
our 2024E EPS 4.2x 2021 levels. A progressive dividend follows (2024E yield nearly
5%).

**Q2: You highlight the growth in the pledge book as a key driver to bottom-line
growth, what is driving that growth?**

**A2: **Looking at demand, most customers use pawnbroking loans to fund day-to-day
living expenses – so demand for their loans is growing, because the cost-of-living
crisis is putting greater pressures on customer cashflows. This positive dynamic
has also been seen at a time of real constraints on the supply of short-term, small-
sum credit.

Non-pawnbroking competitors in this space have withdrawn, in many cases killed by
claims management companies (CMCs) – a risk to which they are only marginally exposed.
Credit unions have moved to larger lending, and most branch-based, small-sum, short-
term lenders have closed.

The company has also been growing its market share of pawnbroking by the acquisition
of weaker rivals, and through a steady, organic store opening and refurbishment 
programme. At a time of growing demand, their long-term, competitive, positive position
has never been stronger.

**Q3: You expressed confidence in the resilience of the model to downturns, what
can you say about that?  **

**A3: **In times of economic challenges, customer cashflows are constrained, and
so the demand for pawnbroking is likely to rise. They should not be thought of as
a lender, because there is no recourse to the customer – only the asset pledged.
This gives it a very different risk and accounting impairment profile from lenders,
and, looking through the unhelpful accounting, actual losses have been very small.

The bottom line is that, recognising that there was a slightly different business
mix and accounting standard, their profits were robust through the early 1990s’ 
recession, the GFC and COVID-19.

**Q4: What about non-pawnbroking businesses?**

**A4: **On our numbers, pawnbroking will be just over 60% of group segmental profit.
Nearly another 20% comes from retail, where it may surprise some listeners to learn
that the company is the sixth-largest jewellery and watch retailer in the UK. They
have multiple competitive advantages in this business.

Pre-owned jewellery is a low-cost source of stock and comes from pledged items not
sold at auction and from customers choosing to sell items, rather than pledge them.
The company’s pricing is at the good value for money end of the spectrum, giving
downside resilience. They already has a secure store network – so the cost of the
stores is spread over other products.

Another business is the scrapping of pledged items that have not been auctioned,
and this generates a further 5% of profit. Leveraging the store network and its 
footfall also gives advantages in point-of-sale forex, which is currently 6% of 
profit but management expects to grow this strongly. Cheque cashing and money transmission
generate modest amounts of revenue but lead to many more customers through the stores.

**Q5: What about the risks?**

**A5: **H&T Group’s customers are cash constrained. Their business money laundering
and stolen goods risk is above average, but our detailed review of their controls
shows good control.

We believe sentiment to the industry is a specific risk, and the company has a strong,
ongoing communication programme to address what are often outdated or simply incorrect
assumptions.

Inflation risk to the cost base is also a specific short-term consideration, but
they have many fixed costs, and we expect strong operational leverage from the business
growth in our forecasts.

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