Is the time right for 1PM?
One of my picks for the 2014 growth portfolio was 1pm (LON:OPM) , a specialist asset finance provider for the UK SME marketplace. In essence, 1PM have been growing by filling the gap created by banks and larger asset houses being reluctant to lend to SME customers. The lending is typically lease finance secured against business assets. This is a business model that has been established for many years, so there is nothing obviously unique about 1PM’s business other than smart relationship selling and astute underwriting to exploit a current gap in the market. While the financial performance of 1PM has been very encouraging over the past couple of years, my hesitation has always been around the sustainability of their growth – what happens to 1PM when the banks resume actively lending to the SME sector again?
This said, 1PM are a relatively small company and it is certainly possible that they could continue to grow in this niche for several years, putting them firmly on the radar for my own 3-5 year investment timeframe. While the company have stated there is a possibility they will look at acquisitions in the future, the immediate investment case for OPM is that they continue to grow organically and can repeat their recent history of exceeding market expectations. The metrics are interesting:
- Share Price 60p
- Market Capitalisation £18m
- 2012/13 Revenue £3.1m (up 34.5% year-on-year)
- 2012/13 Pre-tax profit £775k (up 77% year-on-year)
- EPS growth of 70%
- Current Price to Earnings Ratio of 22
- Company website http://www.1pm.co.uk/
These figures relate to the financial year ended 31st May 2013. In a recent trading update, OPM stated continued strong progress for the half year to the end of November 2013 (interim results to be released week commencing 20th January).
“The Board expects to report significant revenue and profits growth for the first six months of the current financial year compared to the corresponding period last year.
The Group has continued to enjoy strong demand and has written over GBP5m of new business during the first six months of the current trading year, a 28 per cent. increase compared with the first six months of last year (H1 2013: GBP3.9m).The Group also experienced record new business of over GBP1m written during the month of October 2013.
As at 30 November 2013 the loan portfolio stood at GBP17.7m (H1 2013: GBP13.2m), an increase of over 34 per cent. since November last year and a 20 per cent. increase since the year-end in May (FY13: GBP14.8m).”
A PER of 22 is demanding but certainly not outrageous for a company growing at this rate. The immediate investment case for OPM relies on them continuing to grow at these impressive rates and if they do, further share price appreciation should follow. It seems there are no nasty surprises on the immediate horizon but this of course, does not guarantee continued strong performance going forward. While I view 1PM as a well-run niche lending provider, I do not see major barriers to entry or sufficient unique propositions to make an investment in OPM a one way bet. My perception is that recent success has probably been achieved through the endeavours of a handful of skilled and motivated staff, so scalability could also be an issue going forward.
For income investors, there is another dimension to 1PM’s business that might be of interest – providing funding for them to expand their loan book. Returns are currently quoted at 6% gross on £50k – £499k, 6.5% gross on £500k to £999k and 7% gross on £1m plus. This opportunity is available for individual lenders and SIPP funds. Security (assignment of lease agreements) is offered and maintained at 130% of the amount of the loan provided to 1PM. This is clearly an unconventional route for income investors and does not provide any scope for capital growth other than the income generated. Investors interested in pursuing this option should fully research the potential risks and take professional advice.
Overall, I believe 1PM is a successful microcap that has scope for further growth. How far and how fast remain to be seen. Certainly it is a company I plan to follow during 2014 and will comment further as the story unfolds.
Disclosure – I do not currently own shares in OPM.
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3 comments
Thanks Simon. Yes....keeping well enough thanks :-) Trust all is well with you!
Good point about lack of float - potentially a pretty volatile share then, in view of the vulnerabilities. As you say, perhaps momentum traders will fancy it - though they would need to be out before any unexpected disappointments that might trigger a big reversal.
cheers
....mmmm.
I took a quick look at this and I can't say I find it compelling. Certainly there has been a gap in the market that they have exploited, but I wonder where they will be in 2-3 years time and (more particularly) whether the management is strong enough to deal with a scenario that may become less rosy as interest rates start to rise.
Put that together with a share price that has tripled in the last nine months and I would rather be selling than buying at this juncture - even though the upcoming numbers have been trailed as good.
Writing business is the easy bit - all the clearers wrote loads of business in the run-up to 2008....
Good luck though.
ee
Thanks for sharing your observations ee.
Just to be clear, I don't own any shares in OPM and I wasn't advocating them as a buy. Rather, I was highlighting them as a microcap worth watching in 2014.
I agree with much of what you say, although my sense is that there is some further upside potential (during 2014 if not on a longer term view). The shares are quite tightly held, so the reduced free float often serves to exaggerate the PER. Probably more of an opportunity for momentum trading (although not in any sort of size) than being a buy and hold share at this stage.
As I said in the article, I would want to see a more compelling business plan that demonstrated longer term potential. The other factor that I didn't mention in the article (to which you allude) is that the quality of the growing loan book is yet to be properly tested.
I hope you are keeping well by the way, it's been a while since our paths have crossed.
Cheers
Simon