Pawnbroker H&T (HAT) says it is securing loans on items from cows to mobile phones as it seeks to diversify lending away from a traditional focus on gold. We believe there’s now good reason to reappraise the company at 163.5p.
Customers typically take out a pawnbroker loan by receiving cash in exchange for gold jewellery or coins, which is held at the branch as collateral until the loan and interest is repaid.
Now H&T, which exited the unsecured lending market last year because of the exorbitant rates needed to cover costs and loan defaults, is focusing on a number of initiatives including secured agricultural loans. Chief executive officer John Nichols tells Shares it is part of a plan to increase its share of lending on ‘non-traditional’ collateral from around 5% to 10% of its lending book over time.
‘The lending market has totally changed since 2008,’ he says. ‘Our new initiatives are based on the idea that while customer habits are changing, there is still significant demand from people who need short-term cash.’
H&T’s business model has been squeezed in recent years on one side from a plummeting gold price and the other from tougher regulation.
Gold peaked at close to $1,900 per ounce in 2011, but has since fallen more than a third to $1,233 per ounce. The decline has reduced the incentive for owners of jewellery and precious metals to cash in on their assets. Gold buying profits at companies across the industry have plummeted and played a role in sending H&T’s rival Albemarle & Bond into administration.
A regulatory drive to force lenders into fairer lending practices has also taken its toll after a public backlash against high interest rates charged on payday and other short term loans.
Unsecured lender Wonga was the most recent to draw the ire of the regulator, the Financial Conduct Authority (FCA). It was ordered to cancel loans to 330,000 borrowers at a reported cost of £220 million because of failures to take into account affordability criteria. As well as implementing sounder lending practices, the FCA has also proposed an interest rate cap of 0.8% per day for payday lenders. Pawnbroker loans, which typically charge lower rates anyway, are currently exempt.
H&T plans to combat the business challenges it faces with new lending products and a focus on second-hand jewellery retailing. It has launched five standalone jewellery shops on short-term leases as well as a website under the brand ß to attract shoppers who might be put off from buying from a pawnbroker office.
The £60 million market cap’s share price more than halved from a peak of 390p in 2011 to 134p in December 2013. It now trades on a price to book ratio of 0.6, though this excludes its long-term rental obligations relating to stores, an off-balance sheet liability.