H&T Group Plc - Defensive / Growth investment

Writen by Ed Stacey


H&T Group PLC (LON:HAT) is the UK market leader in pawnbroking, with a chain of 182 high street stores across the county, offering consumers secured credit against items such as gold, watches, and jewellery. In addition to the core pawnbroking activity and related jewellery and watch retailing, H&T Group offers a range of other financial services, detailed in this report.

A key element of H&T’s business model is the retention of high-quality staff, to deliver good customer service in its branches. This service culture has enabled H&T to establish market leadership in the UK, with strong customer loyalty in the localities it serves. The company estimates that 90% of pawnbroking revenue comes from repeat customers.

The business has attractive defensive qualities as an investment, given the liquid nature of the collateral, and conservative lending policies. Indeed, H&T delivered earnings growth right through the 2007-2009 financial crisis.


UK pawnbroking is essentially a mature industry; however, H&T has delivered strong earnings growth over the last five years. Recent growth has been driven by the personal loans and other non-pawnbroking services.In addition, the company has achieved growth in the retail segment, supported by the rollout of a new retail website.

The H&T online offering follows a clicks-to-bricks model, allowing customers to order online, with transactions completed in store. The online platform will support all of H&T’s business areas going forward.


H&T Group has delivered an earnings per share (EPS) compound annual growth rate (CAGR) of 17.9% over the last five years (to 2018e) and a dividend (DPS) CAGR of 20.3%. In the last financial year, the company delivered a pre-tax return on equity (RoE) of 13.1% (pre-tax profit / net asset value) and has demonstrated the ability to keep reinvesting to grow the loan book and the business while maintaining a dividend pay-out (DPS/EPS) of more than 30 % every year for the last five years.

For a company with strong defensive attributes and good growth prospects, we argue that the current P/E valuation of only 10.9x (2018e) represents an interesting potential entry point.


H&T has been a strong investment over the last five years. The following chart shows the performance of H&T compared with the FTSE All-share: H&T has outperformed by 49.9% over the period. This reflects strong financial performance from H&T, with earnings per share (EPS) achieving a compound annual growth rate (CAGR) of 17.9% (over five years to 2018e) and a CAGR of 20.3% for the dividend (DPS).

In this report we consider some of the fundamental drivers of H&T’s performance:

  • A market leading position in UK pawnbroking provides a stable bedrock to group profitability and a strong high street presence to promote other services.
  • Ongoing growth opportunities in each of the company’s business areas, including potential growth from the recently developed online platform.
  • Strong financial discipline, with conservative lending and accounting policies, low balance sheet gearing, and a healthy dividend pay-out ratio.

In this report we will be giving special focus to the three large business units – Pawnbroking, Personal Loans, and Retail – which are also the businesses that contributed the most to growth in the group’s gross profits in 2017. The following chart shows the bridge from 2016 profits to 2017.


H&T operates a network of high-street stores across the UK offering personal finance services, with a leading position in pawnbroking. The following charts show H&T’s different business lines by gross profit contribution and segmental assets.

The retail and pawnbroking scrap businesses can be seen as direct adjuncts to the pawnbroking business,  providing routes for the disposal of goods acquired through the pawnbroking activity. The other business lines are services that are in demand from the high street customer base, with the reassurance of H&T as a trusted local brand.

High street presence

H&T has existed in some form since the late 1800s, and today operates 182 stores across the country. The map to the right shows the geographic spread.

The company places great emphasis on customer service, and has built a reputation as a reliable financial partner to the communities in which it operates, through the face-to-face approach.

Online channel – “clicks to bricks”

In more recent years H&T has developed an online channel-to-market to complement its high street presence. The company is adopting a click-to-bricks approach, meaning that customers will be able to apply online for any product H&T offers, and complete their transaction in store (or vice-versa).
So far, the online approach has had its biggest impact on the retail segment, with potential for increased penetration across the other business areas.


The pawnbroking business offers loans of up to six months’ duration, secured against items of tangible value -  typically gold, jewellery and watches (together these make up 99% of the pledge book). The typical loan-to-value is 70%, leaving H&T headroom to recover their capital if a customer does not repay their loan.
H&T is the market leader in the UK pawnbroking industry. The following chart shows market shares as measured by the total value of the company’s pledge book.

A core element of H&T’s value proposition is customer service. The company retains a highly trained and motivated workforce, to ensure that the right lending is made available to the right customers and to ensure that the customer is well informed and well treated at each step of the process.

These characteristics are important because a pawnbroking business thrives on customer loyalty. Contrary to some perceptions of pawnbroking as an “emergency” source of finance, actually a high proportion of users are habitual customers – H&T estimates that 90% of business comes from repeat customers.

The demographics of the customer base are broadly spread across age groups, albeit with an underweight exposure to millennials (students don’t have gold watches to pawn). The following chart shows the demographic age profile of H&T’s pawnbroking customer base.

Pawnbroking financial characteristics

An important key performance indicator (KPI) for the pawnbroking business is the redemption rate – the percentage of loans that result in the customer making their repayment and reclaiming their goods. This is particularly important in sustaining repeat business as customers who do not redeem their pledge are unlikely to become regulars. The following chart shows H&T’s redemption rate in recent years.

Redemption rates have held steady in recent years, and have been above 75% every year for the last 10 years.

We next consider the service charge realised by H&T in recent years – this is a key profit metric in pawnbroking. The following graph shows the pawn service charge and the yield, defined as pawn service charge as a percentage of the average pledge book.

We argue that a smooth progression on this metric is indicative of:

  1. Prudent lending: A pawnbroker lending aggressively relative to the value of goods would suffer volatility in their profits.
  2. Prudent accounting: Pawn service charge is recognised using accrual accounting. A pawnbroker over-accruing in one period could suffer volatility in subsequent periods.

We note that H&T’s pawn service charge income rose even during the 2008-2009 financial crisis, another indicator of the defensive nature of this business.

In terms of growth going forwards, we don’t expect aggressive expansion of the high street estate of stores, as this is essentially a mature sector; however, there is potential for growth via consolidation in the sector, should smaller independent stores become available at attractive valuations. Also, there is the potential for like-for-like revenue growth from the current stores, particularly via the digital platform. The clicks-to-bricks model allows H&T to expand its reach to new customers while retaining the in-store expertise to make final assessments of the goods before completing transactions.


The personal loans business provides unsecured credit, based on detailed affordability checks on the individual customers. We estimate that 90% of loans are provided in-store, with the remainder coming from the growing online business and a small stream of business from third-party referrals.
It is important to distinguish the H&T personal loans business from the payday loans segment. The UK government applied new rate caps on high-cost short-term (HCST) credit in 2015, and H&T’s business was barely affected at all because the company had always stayed away from the very short-term high-interest rate segment.

The following chart shows how H&T is positioned compared to some UK stock market listed consumer lending specialists. These are not strictly a “peer” group as the businesses are not entirely comparable to H&T’s loans business, but the comparison gives an indication of where H&T sits in the market landscape. The chart shows loan book split into <50% annual percentage return (APR) loans (near-prime), loans with APRs of between 50% and 100% (intermediate risk), and loans of more than 100% APR (high-cost short-term).

The following chart shows how H&T is positioned compared to some UK stock market listed consumer lending specialists. These are not strictly a “peer” group as the businesses are not entirely comparable to H&T’s loans business, but the comparison gives an indication of where H&T sits in the market landscape. The chart shows loan book split into <50% annual percentage return (APR) loans (near-prime), loans with APRs of between 50% and 100% (intermediate risk), and loans of more than 100% APR (high-cost short-term).


We don’t suggest these metrics as a measure of “quality” or overall “riskiness”. The businesses simply operate in different segments: Morses Clubs provides home credit (doorstep lending); Non Standard Financial Group home credit, branch-based lending (similar to H&T), and guarantor loans; Provident offers payday loans, vehicle finance and sub-prime credit card lending, and S&U is in vehicle finance. There are many other players that are not UK stock market-listed, such as Wonga or Sunny in payday loans, or Amigo in guarantor loans.

During the past two years, H&T has entered the near-prime (<50% APR) segment and expanded further into the intermediate segment. This reflects the company’s strategy to provide its customers with a pathway to rebuild a credit history, starting with the HCST product and progressing with H&T towards near-prime.

The following chart shows how the H&T personal loan book evolved from 2016 to 2017.

An important measure of risk for a personal loans business is the impairment ratio – the level of write-downs of delinquent loans relative to the overall loan book.

H&T’s increasing shift into the lower risk segments has meant that the company has been able to sharply increase its overall personal loans business, whilst reducing the impairment ratio. The following chart illustrates these metrics.


The retail business offers new and second-hand jewellery and watches. Most of these items are sourced from H&T’s pawnbroking business – items from pledges that are not redeemed by the customer – as well as some goods purchased over the counter, and a small amount are from third-party suppliers.

The goods are sold in store and via the retail website which has begun to gain significant traction during the last two years.

The following chart shows the revenue growth of the H&T retail business

The online channel was an important revenue contributor in 2017, and we believe this will be an increasing feature in 2018 and beyond. The portal offers an enhanced route to market for items such as high-end watches, with the customer having the option to select their product online and then inspect in store before completing their transaction.

H&T operates its online retail through the brand est1897.co.uk in reference to H&T’s original founding date. The graphic below shows the opening page of the site. Investors who are in the market for a high-end watch should visit the site.


The gold purchasing business acquires gold items from customers primarily through the high street stores. Some of these are refurbished and sold through the retail business, with the remainder sold as scrap.

The pawnbroking scrap revenue stream represents the proceeds of unredeemed goods from the pawnbroking business that are not suitable for retail and are therefore sold as scrap.

Both of these businesses are sensitive to the gold price. The following charts show the gross profits of the gold purchasing and pawnbroking scrap businesses, and the spot price of gold.

We present further details of H&T’s sensitivity to gold prices on p11.


Other service offers through H&T stores include third-party cheque cashing, foreign exchange (FX), and the buyback service – acquiring items of some tangible value, typically electronic goods like smart phones, with an agreement to sell them back to the original owner within a set timeframe. Buyback is not unlike pawnbroking in some respects, but typically addresses a younger age demographic. This forms part of H&T’s “We buy anything” proposition.

The following chart shows the gross profit contribution from these “other” businesses. These grew strongly in 2015-2017, driven by the buyback and FX segments.


We next examine some of the financial characteristics that underpin the H&T investment case: robust profitability, a strong balance sheet, and a consistent dividend pay-out. We also examine the company’s sensitivity to the gold price.

Continuous profitability

The following chart shows H&T’s profitability in terms of pre-tax return on equity (RoE), defined as profit before tax (PBT) dividend by net asset value (NAV).

We note that the company has always been profitable, even in the financial crisis 2008/2009. Not many personal finance companies can make this claim.

The RoE declined in 2012-2013, primarily due to the falling gold price in our view. The company subsequently undertook a strategic derisking, including reduced balance sheet leverage. This results in a lower RoE but also greater consistency going forward in our view.

Strong balance sheet

H&T now operates with a low level of net debt. The following chart shows gearing – Net Debt / Equity – compared with the other UK listed personal finance stocks. As with our previous comparison on p4, we don’t see these as direct peers, but representatives of the comparable investment universe.

There are good reasons why the companies in the preceding chart operate with different levels of gearing. For example, Morses Club applies no leverage, given its high exposure to subprime unsecured lending. Meanwhile, S&U in secured auto credit can afford to apply more leverage. We would argue that, in context, H&T is conservative, with low gearing, high exposure to secured lending (pawnbroking) and lower risk unsecured lending (the personal loans profile, p4).

Earnings growth, and dividend pay-out

H&T has delivered strong earnings growth in recent years while offering a healthy dividend, and we expect this to continue in the coming years. The following chart shows the EPS growth, together with the dividend pay-out ratio – DPS / EPS.

Our forecast for earnings growth is driven by further growth in retail and personal loans, supported by the continued expansion of online sales, and demand in the market place. Details of our forecasts are on p12.

Gold price sensitivity

Finally, we consider the sensitivity of H&T to the gold price. The company is exposed to gold because 99% of the pawnbroking pledge book consists of precious metals and jewellery. The following chart illustrates the sensitivity of the share price to gold.

Investors may see gold-price sensitivity as a positive or a negative. We would argue that investors should have some gold plays in their portfolio.


The following tables include our forecasts for H&T’s P&L, balance sheet, and cash flow.


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