Pawnbrokers protect their profit margins by only offering customers a fraction of what their items are worth and by lending cash at eye-watering rates of interest.

Does this pragmatic approach to operating at the distressed end of the credit market make them a good investment?

Investors might expect so, but pawnbrokers have been through the mill over the last few years, thanks to the gold price slump and to tighter restrictions on payday lending and short-term loans.

AIM-listed pawnbroker H&T has emerged from this downturn with a strong balance sheet, falling net debt and a positive outlook.

The firm is also the second-highest ranked UK stock in Stockopedia, with a StockRank of 99 and Value, Quality and Momentum ranks of 87, 91 and 97 respectively.

The question for investors is whether the strong fundamentals implied by these ranks can be maintained, or whether H&T will fall prey to a new set of problems in a few years time.

A complex mix of parts

H&T’s history can be traced back to a business founded in London in 1897, and the firm floated on the AIM market in 2006.

The group had 190 trading units at the end of June. Of these, around 150 are H&T branded pawnbrokers, while the remainder are second-hand jewellery stores, trading under the Est 1897 brand.

For investors who are not overly familiar with how modern pawnbrokers make money, it’s worth explaining that in H&T’s case, there are four main strands of activity.

The largest single source of profits is traditional pawnbroking, which contributed £28.4m to H&T’s gross profits of £45.7m in 2014.

H&T also operates a ‘we buy gold’ service, as do most of its peers. Gross profit from this unit halved from £4.8m to £2.4m last year, due to the weaker gold market and a shift in focus towards retail.

H&T’s retail sales, which are mainly of second-hand jewellery and watches, rose by 24% to £30.9m in 2014 and contributed £10.7m to gross profit.

The final area of the business is unsecured lending. Formerly a payday loan operation, this division was repositioned as a personal loan service last year in-line with changing regulations. H&T offers loans of £50-£1,000 for up to two years. The group sees this as “a key medium term opportunity”, although gross profit from lending fell from £2.9m to…

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