Description

Ramsdens Holdings PLC(RFX: LN) was admitted to the LSE in 2017 and is an FCA regulated Pawnbroker offering 4 services; pawnbroking, precious metal buying, FX currency exchange and retail jewellery sales. The customer base is mixed from lower-income households seeking short term loans and FX money exchange to higher income customers, who use their premium watches and jewellery offerings.

Ramsdens has 158 stores and estimates of the number of pawnbroking stores in the UK at approximately 870. It is the number 2 player in the UK pawnbroking business, behind H&T Group (HAT.LN) which has 273 outlets. The remaining 439 outlets are typically small owner owned businesses and as some of them exit the market they are selling up to Ramsdens or H&T.

Ramsdens has a market cap of £64mn, shares trade today at 200p and FY22 Revenue was £66m.

Jewellery Retail (42% FY22 Revenue)

The Group offers New and Second-hand jewellery, including premium watches, for sale. Customers who are more affluent are buying up gold in the form of jewellery and premium watches as a store of cash and an inflation hedge. In FY22 Jewellery retail generated the most revenue at 42% with a gross profit margin of 38%.

• New jewellery retailing enables the Group to attract customers who prefer not to buy second-hand
• The retailing of new jewellery products complements the Group’s second-hand offering to give their customers greater choice in breadth of products and price points
• This complements the pawnbroking arm where some default or just do not want to redeem the pledged item and it can be sold as part of second-hand jewellery
• Management have guided that the jewellery retail segment may experience the greatest headwinds in FY23 as a result of the inflationary environment and rising cost of living
• However, the FH23 Results from June show retail Jewellery is up 32% vs FH22

Purchase of precious metals (24% FY22 Revenue)

Customers are selling unwanted Jewellery to meet their short-term cash flow needs by taking advantage of the high gold price. Once jewellery has been bought from the customer, the Group’s dedicated jewellery department decides whether or not to retail the item through the store network or online. The residual items are sold to a bullion dealer for their intrinsic value.

• Jewellery is bought on average at around 66% of its intrinsic value and booked on the balance sheet at this value
• Typically, a customer brings unwanted jewellery into a Ramsdens store and a price is agreed with the customer depending upon the retail potential, weight or carat of the jewellery
• Given the wider global political and economic situation, I believe the gold price will remain high in the short to medium term, supporting the Group’s margins
• Growth in this segment is unlikely to abate anytime soon as the gold price remains high and perhaps continues to make new highs
• Precious metal purchasing is up 34% in FH23 VS FH22
  
  

FX (Travel Money) (20% FY22 Revenue)

During the pandemic a lot of large chain-travel-agents located in town-centres, which were the traditional source of FX cash in lower income communities, went under. Ramsdens have capitalised on this gap by taking share of that market and due to significantly less competitors are able to offer a high-spread and thus make a higher margin

• The overall margin achieved on all foreign currency exchanged was 3.5% whereas pre-pandemic it was about 1.7% reflecting the stronger position they now command
• FX 95% sold to customers at 3.5% margin
• 5% bought back at 10% margin
• FX sales by ccy; 85% euro, 10% USD and 5% other
• Lower income consumers purchase a set amount of cash as a way to budget i.e. take cash abroad for both convenience and as a means to assist with budgeting whilst on holiday (only spend what you take)
• The average foreign currency sale transaction value was £469, an increase on the pre pandemic level of £401
• They will also offer a new multi-currency card due to be launched in 2023 to capture more of the customer’s holiday spend while abroad
• FH23 FX exchange is up 40% vs FH22

Pawnbroking (14% FY22 Revenue)

This is an area they are looking to expand. Pawnbroking is a small subset of the consumer credit market in the UK and a simple form of asset backed lending (i.e. lending against a pledge item: gold, silver, jewellery). Pawnbroking is regulated by the FCA, the UK regulator, and Ramsdens is fully FCA authorised. Pawnbroking loans are typically small sums (~£300) over a short period (~ 5 months) and are served face to face with interest rates varying from 1.99% - 9.90% per month depending on the loan value. The period after the GFC (2008) resulted in a number of companies offering micro-loans at inflated interest rates and many stories of their bad behaviour resulting in customers getting into difficulty the regulator getting involved and essentially regulating their business away, the large players got into difficulty and shut down or went bankrupt as was the recent case of Amigo Loans. This is not the same business, loans are not compounded in that way, rather they are asset backed. The maximum downside to the borrower is loss of the item pledged.

Interest is charged on a daily basis so the quicker a customer can repay the less interest is paid – they work with customers to maintain a good relationship, so that in the future customers use their service again. Ramsdens has an online facility which is used by customers to repay their loans when convenient for them and then collecting the pledged goods later, thereby saving customer’s money, fair treatment results in repeat business and they are focused on good customer service. Employees are able to establish relationships with customers in small communities for repeat business and to expand the services customers take up.

Due to unregulated and bad behaviour by companies in the past, pawnbroking is now one of the few ways people can get short-term small-loan-financing. As we saw after the GFC there is significant demand for these services to a large demographic not able to get small short-term loans from banks. This provides a tailwind for their pawnbroking book to grow. Their loan book, as the number 2 player in the market, stands at £9.7m whereas the largest Pawnbroker in the UK has a loan book of £114mn (H&T Group).

• A pawnbroking loan is a flexible loan in that there are no expected weekly or monthly instalments. The customer chooses when they repay their loan. As such there are no missed payments until the loan period expires. At which point the loan+Interest+fees are met by the disposal of the item and surplus is returned to the customer
• The loan-to-value is conservative. Customers pledge their gold, precious metals or other jewellery about a 60% to 70% loan-to-value. Thus, leaving more than 30% margin of safety on any loan
• The average loan value as of the last annual report in September 2022 was around £303, up from £264 as at 30 September 2021 with an average interest rate of 10% a month
• 85% pay the loan back with interest
• Due to inflation i.e. increased costs of food, energy bills, higher interest rates i.e. higher housing rents and general increase in cost-of-living Ramsdens expects the squeeze on household incomes in FY23 leading to an increased demand for consumer borrowing. If consumers have assets to pledge, pawnbroking can provide a short-term solution and therefore they expect their loan book to increase further in FY23
• Their loan book is currently about £9.7mn at FH23 up from FY22 end of £8.6mn (FY21 £6.1mn)
• FH23 Pawnbroking is up 33%

Valuation

Due to the pandemic stores were closed for most of FY20 and FY21 with FY2022 being the recovery year. If it was not for those closures the store estate and revenues would be ahead of what they are now. I point this out because I look at this over a 3 years of normal operation period, rather than the 5 years that have passed.
Today their Market Cap is 64mn and their NAV is £43mn. FY23 has seen volatility in the stock. Around the FY22 results in Jan 2023 the market cap was higher than today at around ~£69mn TEV/EBITDA ~ 4.8, and similarly around the interim results in June the stock traded up to 6X at £2.6 per share i.e. 30% up from here. Since then, their results have got better, the dividend has risen this year but the stock is trading at its lowest multiple.

• Revenue has grown from 40mn in FY18 to 66mn in FY22. Revenue per store has increased from ~£300k in FY18 and FY19, ~£420k in FY22 and in a June 2023 update it looks like they are on target to generate ~ £500k in FY23
• They use a revolving credit facility for their FX business i.e to have the currency available for customers to collect but do not have long term debt
• Net cash position: In FY22 it was £8.8mn. Following significant investment in jewellery stock of £7.2mn, investments in new stores, ongoing growth of the pawnbroking loan book and dividends payout they have Net Cash of £5.5mn today (FH2023)
• This year the segmented revenue results look even better HY23 vs HY22 revenues are: Pawnbroking is up 32%, Precious metal purchasing is up 34%, Retail Jewellery is up 32% and FX exchange is up 40%
• In FH23(June) they issued their interim report and revenues is already at £39mn i.e. 60% of FY22. They seem bullish on their prospects as they have increased the interim dividends by 22% in FH23 and I expect similar hike in the final, larger, dividend
• I expect the second half revenues to be higher so conservatively just doubling FH23 we get ~80mn revenue
• Net Income margin for FY18, FY19 and FY22 between ~ 10% -13%. At 80mn revenue for FY23 we get a ~8mn net income or 25.3p a share
• TEV/EBITDA per-pandemic 2018~6.5 and 2019 ~5.5
• Around the FY22 results EBITDA was £12.5mn and a market cap of ~£69mn with cash of 8.8mn giving a TEV/EBITDA ~ 4.8, this is the lowest it has been over the period of normal(non-pandemic) operations
• With 8mn net income, the tax expense has been ~ 20% historically and their revolver interest expense for the FX is about £500k. D&A in FY22 was ~£3.7mn and in FH23 it was in line with FH22, but there are 12 new outlets opening in 2023 so I charge £4mn for FY23
• This gives an approximate FY23 EBITDA~ 14.5mn and thus we get a TEV/EBITDA ~ 4 at today’s price. This is too conservative given its historical 5-6 X valuation and given that EBITDA has grown ~16%, Profit Before Tax is up 68% to HY23 £3.7m (HY22: £2.2m), dividends is up 22% and all business lines are ahead this year
  • Revenue at £80mn: EBITDA ~14.5mn thus at 5X gives 22% upside and at 6x gives 44.5% upside

Dividends

It also pays a good dividends while you wait!

• FY22 dividends was 9p per share or 43% of the total 20.9p Net income. They paid 2.7p interim dividends in the first 6 months and 6.3p final dividends
• FY23 they will pay 3.3p interim dividends (7th September ex-div) a hike of 22% so they seem confident in their outlook and I expect an increase on the 6.3p final dividends too. If they pay the same ~43% of my expected 25.3p EPS out in FY23 that gives ~11p giving a FY23 dividends yield of 5.5% at today’s £2 share price
• FY23 at 5 X gives 22% return + 5.5% =27.5%
• FY23 at 6X gives 44.5% return +5.5% =50%
  • This gives a Total return for FY23 of between ~ 27.5% - 50% at today’s price
• This range is consistent with its historical trading range of a P/E of 10 which alone gives a price of 253p or 26.5% upside from here (EPS of 25.3p) +5.5% dividends i.e. 32% total.
• I expect them to report FY23 in the second half of January 2024

Looking ahead

Comparison with H&T Group

The largest and in fact only other competitor of size is H&T Group (LSE:HAT) it has a market cap ~175mn and 273 stores with revenue per store of 725k.
It had FY22 Revenue of 174mn, EBITDA £29.6mn, Net income of 14.9mn and traded at FY22 TEV/EBITDA ~6-6.5

Ramsdens is well on its way to increasing both store estate and revenue per store and given the current environment I expect them to be able to significantly grow their loan book.
They look to be able to hit a Revenue of >£100mn by FY24: I estimate conservatively EBITDA~ 16.8mn which gives at 5x gives 40% upside at 6X gives 66% upside + dividends of ~6.8%.

• Total 2-Year return of ~ 46.7% - 72.7% at today’s price and all being equal it looks like a doubling in the 3-4 years range

Risks

• Squeeze on incomes results in fewer holidays thus reducing the need for FX
• Squeeze on income results in less jewellery buying
• Gold price will go down, reducing the margin and the ability to offer larger loans

Catalyst

• Increasing revenue per store
• Store estate expansion
• Increasing Loan Book
• Dividend Increase
• Goverment legislation to increase minimum wage
• Continuted wage increases as companies compete for blue-collar workers