LON:SUS | Stockopedia Computer Says Value Trap - I Say No.

18th May '17 by jjis

20 comments 12347 reads

This is one of my long standing holdings which has delivered excellent returns for me over
the years. As I have written before it is one of those family run businesses which Lord Lee is fond of backing and indeed I think he has been in this one in the past. Any way I digress, but the stock concerned is S&U (LON:SUS) which is now a £240 million market cap. car loan company which also has a fledgling bridging loan operation. So why mention it today? Well they have their AGM today and have put out a trading update statement ahead of that.

This confirmed continued strong trading despite what the share price might have been suggesting. If that is of interest you can read the announcement and learn more about S&U at their investor relations website. Here you'll also find links to some Proactive Investor Interviews with Anthony Coombs, chairman of S & U. I thought the last one, which you can view here if
your want, was interesting as he seemed to be pretty confident about on going growth as they only take a small proportion of all the loans they are offered by their panel.

Cutting to the chase I think the shares look good value down here on around 10x this years forecast earnings with a 5% yield based on both of these growing in double digits, which seem likely given the latest update and the Chairman's confident comments in the interview after the
finals in April. Looking at the chart you are would not getting in at the top if you were to buy in now as the they have come back from over £25 to their current £20 or so.

Looking at the chart below I have drawn on the trading range and what is called a triangle formation by connecting the highs in the recent downtrend and it looks like it might break out of this triangle one way or the other fairly soon. The theory is I believe that it should
then move by around the height of the triangle which in this case is roughly 500p. So that would suggest targets on a decisive break, of either £15 or £25 which would be around the old highs which could then act as…

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Edward Croft

18th May '17

Jamie - this is exactly the kind of debate I hoped we'd help trigger - challenges to the Style Classifications.

The Style Classifications are obviously auto-generated and the performance histories are based on averages... and we know there's lies, damn lies and statistics !

The point cases that disagree with the classifications are where stock pickers and analysts should all be adding value.

My view is that there are 2 ways to make money in the market. Beta and Alpha. What we're trying to do with the StockRanks (and Styles) is highlight the available beta in the market... where we add value as stock pickers is in finding the Alpha.

If a portfolio is skewed towards the 'losing' styles then it's fighting against the tide of Beta... but there's nothing wrong with us holding 'losing' styles of stocks if we have genuine Alpha insight and we know the ranks to be missing something.

That's my view anyway. I believe there is more to be gained from focusing individual research efforts into lower ranking, "Losing" Style shares than in higher ranking shares.

monions

It would be good if a local chartist could take a look at this and confirm the triangle pattern. I'm very interested in using charts (but totally new to it), so would be good to see how the technical analysis works on a real live example. I've always used fundamentals and a brief look at a chart, but I think there is so much more we could be covering.

Would Stephen Hoad be able to take a look - I know it's outside of the blog series, but would be a good example to discuss around.

My newbie TA thoughts are that it's been in a channel since early Nov - a high line of 2300 and low line of 1950. In a shorter time it has been in a down trend since February, with the trend line sitting at around 2020 today. To breakout from that trend it would need to break the line by 3%, so needs to hit 2080. Also, all the MA (50,100,200) are inverted and trending down which isn't a good sign, although MACD has just turned positive.

This is my take, (guess who's been reading some books on this recently). Glad to have an expert opinion and be corrected.

I know most people here don't focus on TA, but it would be good to have some discussion as I think it definitely has potential when combined with fundamentals.

jjis

Hi monions thanks for your reply & thoughts on the technical picture. Agree it would be good if Ed. could arrange for his in house chartist to take a proper chartist view of it as I am certainly not an avid chartist, but as you say ..."most people here don't focus on TA, but it would be good to have some discussion as I think it definitely has potential when combined with fundamentals." Agreed, Regards Jamie

GrahamF

19th May '17

I've been hearing and reading generally that over the last few years sales of new cars have done very well as people are choosing to pay using monthly payment plan type finance. So, the market in which S&U are operating has been expanding and they should be doing very well.

Are they doing well? It rather depends on what number you choose to look at. I looked at the Free Cash Flow.

The FCF ps has been

2017 -231

2016 -140.7

2015 -121.4

2014 -52.3

I appreciate that financing businesses may have accounting that is beyond my trivial understanding, but I cannot help feeling that if they cannot generate positive cash flow, especially in a growth market, something's got to give sooner or later. A dividend cut perhaps?

So, it does look like it might be a value trap to me

Stephen Hoad

Hello - resident technical guy responding.... I'll try and answer as many of your points as possible...

1st step take a look at the higher time frames, then work your way down i.e. weekly chart, daily chart. (One of the golden rules of Technical Analysis)
2nd the answer (if there is one) depends entirely on your time horizons as an investor or a trader. I am a trader and look for short term opportunities - the daily chart is giving me no such signs currently, to me from the chart drawn it looks like it wants to bounce down off the long term trend line - so possible short selling op? Currently: : trend down, momentum down etc, looks weak. So I would ignore this opportunity (for the moment) and find something else - cold approach but that's how I've learnt as a trader (plenty more fish in the sea etc) Technical Analysis (TA) is a very systematic process and from my experience that makes the best TA traders - so I don't care about the fundamentals in execution of a trade its the story in the chart that will make me trade.

If I had my investors / longer term hat on - the weekly chart is looking positive for SUS. (Other analysts might conclude that there is the build up of a possible heads & shoulders formation - which would be extremely bearish - which if played out could possibly have a down target of 1300!) At current levels though price could be providing support for a possible correction move North (sitting on key long term Fibonacci line) but it is still drifting slowly south on bearish momentum - so no technical clues as yet for an imminent change of direction. Again, I'd use the daily chart to time my entry back in if the conditions were technically correct to get the best bang for my buck but only when the technical conditions are right.

This is how I'd view it purely technically. If I did start to add in the fundamentals, Id create an opinion and again use the TA to time my way in, instead of just going in on the fundamentals. (that's not my style of trading). I 100% agree though that if the fundamentals and technicals marry up (essentially 2 independent sources of analysis) this can make for a very strong, efficient trading strategy. SUS looks like it needs something positive in the fundamentals to give it a kick start to go North?

(Above not investment advice, just education as to how I'd interpret the situation from a technical analysis point of view)

20th May '17

Hi Graham, thanks for your reply to this post and for highlighting the cash flow which I'll come onto in a moment. First just to point out that they operate primarily in financing used cars rather than the new cars / PCP etc. which have been in the news recently. They have also grown this business every year since they started offering these car loans and this part of their operations has achieved 17 consecutive years of record profits.

When they set this business (Advantage Finance) up they were also involved in Weekly Home Collected credit which they ran until they sold it a couple of years ago, which then de-geared their balance sheet and left them with some cash after they had also returned some of the capital realised via a special dividend to Shareholders.

This brings me onto their balance sheet management, capital allocation and cash flow etc. Being a family run firm with a long history (established 1938) they have in recent decades been fairly conservatively run. This was evidenced by the fact that they ran the business through the 90's and 00's with a relatively modest level of gearing in double digits which compared to other banks and similar financial institutions which ran with gearing in the 100's or in multiples of their equity. The result of this in the financial crisis was that the likes of Lloyds, RBS, had to be bailed out by tax payers and suspend their dividends. While a similar operator to S & U called Cattles ceased to exist although I can't remember if it went bust or got taken over for pennies. Through this tumultuous period S & U continued to make profits and at worst maintained its dividend for 2 or 3 years, before returning to strong growth again more recently.

Post all this and the Home Collected Credit disposal I mentioned above, they have continued to grow the Advantage Car Loan business profitably and have started to take on some modest gearing to facilitate this growth, hence the cash outflows. They have facilities in place to fund similar growth rates and outflows for another 2 or 3 years, but beyond that I guess they might then have to slow the growth in this side of the business.

So in conclusion, personally I wouldn't worry too much about the cash out flows at this stage as it is funding profitable growth and the balance sheet still seems fine and has plenty of capacity. I would also not expect to see the dividend cut that you suggest given the history of this one, but I guess you never know for sure. Beyond that the growth could slow a few years out, but their new bridging finance business might be chipping in by then too. Nevertheless I don't think the rating is taking into account much growth in the short term in any event.

Hope this helps, but appreciate this may not be everyone's cup of tea.

Jamie

gus 1065

Hi Jamie.

Filling in the blanks on Cattles, it effectively went bust in 2009 collapsing into a messy spat between the creditors and the accountants (PwC) with a couple of the directors being indicted (and I think finally struck off) for alleged fraudulent accounting. Company was ultimately liquidated in 2016. Potted history can be found here:-

http://www.cattles.co.uk/about-us/company-history

The U.K. Car loan business is littered with similar tales of over rapid expansion in the good times leading to problems when access to wholesale funding dries up (the banks pull the plug or as per 2008 the securitisation capital markets disappear overnight) and they get stuck holding a load of bad debts and aggressively priced vehicle residual values. S&U (LON:SUS) seems to have a good, conservative track record but due care needed by the private investor, especially if the wider economy falters.

Best,

Gus.

Hi Gus,
Thanks for the reminder on Cattles. Which I see is back from the dead now as part of Morses Club (MCL) - MCL form a recent Hardman & Co. note "which is now the number 2 HCC business in the UK with a market share of approaching 15% having started HCC in 1997. It was the number four provider when in 2014 it took over Shopacheck Financial Services (SFS). That business was established in 1933 when Cattles plc extended into UK HCC and was the second largest provider at the time. Since then, management have fully integrated the two businesses with an initial focus on improving the quality of the SFS loan book as well as developing a range of a growth options."

I see MCL is currently just under 20% geared and therefore is more conservatively financed than Cattles was! MCL and Non Standard Finance NSF who bought S & U's Home credit business are both on similar / slightly higher rating that SUS see:

Comparison

So as ever you pay your money and take your choice - or not as the case may be.

21st May '17

Hi Stephen, thanks for your reply and thoughts on the current technical situation. I don't suppose you would be able to insert or attach some charts to show what you are saying when you are back at your desk / computer? No worries if you can't as I found it difficult to get the chart into the original post!

24th May '17

Weekly chart for SUS:LON.....

Wimbledonsprinter

11th Aug '17

Jamie

I don't know much about S&U but am starting to look at it as it is on a low PE and high div yield. I agree that the negative FCF is not a concern - any financing business that is growing (i.e. increasing its lending book) is going to have negative FCF. The key issue is whether the quality of the loan book is being maintained as the lending activity accelerates. S&U seems to have a good history here but history is full of counter-examples.

The market cap is currently approx. £239 million, which you could split out into £139 million, which is the book value (Jan 2017) - i.e. the value of the existing loan book (assuming the management has correctly provisioned for impairments) and £100 million for the value of future loans that the business will make (or the franchise value of the business). Guestimating what he franchise value should be is the tough part - but 1.7x book value does not appear outrageously cheap, when you look at it this way.

lightningtiger

12th Aug '17

The longer term trend over a year has been down. There was a time around Oct/Nov when the 50 day MA clearly broke the trend and your stop loss should have taken you out then.

At this point in time if you look at the shares in the banking sector S&U has a 50 day MA of -1.23 and a 200 day MA of -6.25 to confirm this trend. Burford Capitol on the other hand has positive figures.

S & U has recently also been a set of 4 lower lows which is not good news either.

When the share price comes down then the dividend yield goes up, and when the share price goes up then the Dividend yield goes down. Let's say when the share price was 2500p it paid a 5% dividend, it would pay out 125p,but if it paid out that same 125p now at around 2000p, then the yield would be 125/2000 = 6.25%.

You need to keep the share above the 2 MA's be it 10 day 20 day or whatever, A very successful investor in Canada uses a 3 & 8 day and when the share price goes below either line the share is sold.

14th Aug '17

Hi wimbledonsprinter thanks for your thoughts. I would tend to trust the management to be conservative on the provisioning & the Chairman has said that they can afford to pretty selective about the loans they take on. As you say though there have been contrary examples from other companies in the past.

As and when we see another down turn / recession will be the big test, but worth remembering that when all the banks were being bailed out by us in 2008/9 this one chugged away and maintained their dividend. Within that the Car loans business, which is now their main business as they had home collected credit at the time, grew through the financial crisis.

As for the valuation, it is probably a bit cheaper now the price has come down further, but I would agree that on P/B it looks about fair value against the mid teens ROE, although this compares favourable with similar businesses.

The most recent update was still positive and the Chairman emphasised that they do no do PCP which has been the area attracting negative comments. The figures did show continued strong growth although there was a slow down in the rate of growth. I guess in the absence of a catalyst the shares may well continue to drift and as the previous poster said they don't look great on the technical side of things at the moment - so the jury is still out on this one.

15th Aug '17

Thanks for the reply Jamie. I see H & T (LON:HAT) had good results today, presumably their customer base is on average in a more precarious state than £SUS? Do you have a good feel about the average profile of an S&U customer? Is it the kind of customer base that will benefit from the propsed increases in the living wage over the next few years?

14th Nov '17

Quick update on this one as it seems to have found some support at the lower levels and recovered towards the middle of its recent range, where some resistance may await perhaps. I note however it is now that the Stockopedia Style Council now defines it as "Style Neutral" having escaped the value trap for now as I thought it might.

It Seems the Quality Score has gone up quite a bit from 40 to 56, while given the price move the value rank is down a tad from 75 to 70 & Momentum is up from 30 to 63 taking the Stock Rank from 43 to 72. Who knows given Mr Markets Ever Changing Moods perhaps I'll shout to the top if it gets back to 2500p & becomes a Super Stock perhaps?

As long as the lights don’t go out and the walls don’t come crumbling down!

3rd May '18

Quick update nearly a year on. Well it's no longer a value trap, but it seems style neutral can be good for you too. It has risen back towards and indeed hit the top of its range again recently. Still delivering and continues to look reasonable value to me. Q1 Trading update & AGM due on the 18th May. If you got in at the lower levels and are of a nervous disposition then now could be a good time to take profits ahead of that. Personally I'm still happy to continue holding given the rating and the growth that they are expected to deliver. Cum a 45p dividend this year until 14/6/18 too.

Nick Ray

The Quality Rank would be about 75 if Stocko only use the RO* metrics. That would make the stock a High Flyer.

But they overweight the Piotrowski score which is a lowish 4 for S&U (LON:SUS) and this pulls the Q score down a long way.

Sometimes it is worth looking at the individual components of the Q V M scores to see whether there are patterns which differ from the simple weighted average.

iwright7

Nick,

I am not so sure that the F-Score is over weighted in the Q score. This is because I believe that the a High F-Score is statistically predictive of market beating future returns.

One point to watch though is just how the F-Score scoring is calculated. In this case an F-Score of 4 is poor, but when you dig into it, 2 of the Fails are only just Fails i.e. so in practice I would F-Score S and U a 6.

Is pricing power improving and/or costs reducing?
S&U Details: Gross Mgn, Last Yr = 78.3 , Gross Mgn 1y Ago = 78.7 Fail

Is it more productive than last year?
S&U Details: Asset Turnover (Piotroski) = 0.30 , Asset Turnover (Piotroski), 1y Ago = 0.31 Fail

Velo

jjis - Sorry mate have to disagree with you on the style ratings. The value trap rating was doing it's job 100% and then some, when you posted back in May 2017 - it was bang on the money!

- If you'd bought at any time, at any time, up to a year earlier from the summerr of 2016 onwards - you'd have lost money by the time of your May 2017 post. In fact if new investors appeared and bought every single month for the 12 months up to your post - they'd have all lost money (if they sold at the date of your original post) - before it improved in the immediate months or so, following on your original post.

Been clicking the "print" history pages to try and see the style ratings before summer 2016 - but they didn't exist back then. The SP in the month or so after your post improved dramatically and off it went on a lovely bull rally.

So tried checking what the style rating was - and once again (for me) it was bang on the money, as it removed the "value trap" moniker and replaced it with the less dangerous and er... more neutral :) "nuetral" style rating for the first since the summer of 2016 - which it still sports currently when it changed it on AUGUST 2017 (Which is when the SP took off on a bull run).

Check the price action history and you'll see the SP more or less hit it's lowest point of a rotten retrace lasting a year and a quarter until just after your post - it then in approx August 2017 commenced it's bull run - and that's exactly when the style rating dumped the 'value trap' and replaced it with 'neutral'.

I think that's a convincing thumbs up for the style ratings. It saved new investors from disaster for more than a year - then opened the door to let investors in without them fearing the worst - right on cue! (Also the Stock Ranking has massively improved more positively from the lowly rating back at the time of your original post and has increased since Aug 2017 to today's S/R of 73 - another plus).

Holding this share from approx 2010 or the year before would make it the star performer in any portfolio - so your adherence to it's potential has proved fruiful - but the style ratings must escape your ire - they did what they were supposed to - and when things improved - so did the style rating.

Style Ratings? - For me It's a 10 from Len.

------------------------------------------

By the way - your final para in your original post back in May 2017: "My money is obviously on a breakout to the upside, but as ever you pay your money and take your choice. In the meantime I'll continue to enjoy the 5% yield including the 39p final worth 1.95% which is due to go XD on 15th June". - Kudos and kudos again to you - spot on the money!

P.S. Don't know much about S&U - but what's with that explosive nett debt increase in the last 12 months?

P.P.S. Burford Capital is a share that has seriously challenged it's timid rating and rankings. But haven't looked at BUR in detail.

Stockopedia Computer Says Value Trap - I say No.

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Jjis

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