Did you know that the history of pawnbroking is older than that of banking? In fact, it can be traced way back over 3,000 years and to the Chinese. We may not have discovered the Americas if Isabella, the Queen of Spain, had not pawned her jewels to pay for the voyages of Christopher Columbus.
In Italy in the fifteenth century the Medici family were well known as one of the most powerful financial families in Europe. They split in two – one side becoming bankers, the other side becoming pawnbrokers. That is when the three gold balls sign came into play, derived from the family crest.
In the 1800’s there were some 10,000 pawnbroking operations in the UK, almost as many as ale houses. By 2012 that number had fallen to around 2,000, today there are only around 1,300. On the face of it pawnbroking could be considered a dying business – but that is so wrong.
Today it is a more sophisticated business and it is a very much needed sector.
Pawnbroking is the process of offering secured loans to people with items of personal property used as collateral, such items being known as ‘pledges’.
It is a simple form of asset backed lending where an item of value is given to the pawnbroker in exchange for a cash loan. Customers who repay the capital sum borrowed, plus interest, receive their pledged item back. If a customer fails to repay the loan, the pawnbroker sells the pledged item to repay the amount borrowed plus interest and fees. Once the loan capital, interest and fees have been recovered, the pawnbroker must return all surplus funds to the customer.
Last year some 832,000 customers used the services of Ramsdens Holdings (LON:RFX). This FCA regulated Middlesborough based group has some 160 stores in the UK, as well as a small online operation. It is a growing, diversified, financial services provider and retailer, operating in the four core business segments of pawnbroking loans, precious metals buying and selling, foreign currency exchange, and retailing of second hand and new jewellery.
The company has some 30,837,653 shares in issue, which values it at around £63m.
Larger holders include: Downing LLP (14.87%), Canaccord Genuity (9.29%), Premier Fund (8.07%), Hargreaves Lansdown (7.51%), Otus Capital (6.46%), AXA Investment (4.74%), Interactive Investor (4.25%), and Close Asset (4.14%).
Peter Kenyon, the group’s Chief Executive, holds 3.70% of the company’s equity.
The group will be announcing its interim results on 3 December, however, the recent Trading Update sounded bullish. Peter Kenyon told shareholders that the strength of the group’s diversified income streams and its overall operations had shown through with a good trading performance in the first half.
He noted that apart from results from trading there will also be a very useful £600,000 non-recurring profit from selling off some of the group’s slower-moving jewellery stock.
The company confidently predicts that it will continue to deliver on its strategic objectives and it will make further progress in its second half year to the end of March 2020.
In the year to end March 2019 the company had revenue of £46.78m, upon which it made £6.49m pre-tax profits, earnings of 16.73p and dividend of 7.20p per share.
Brokers estimates suggest that revenue this year could be £53m, with pre-tax profits of £7.5m, earnings at 19.80p and a 7.40p dividend.
For next year they compute £57m of revenue, pre-tax £8.30m, earnings of 21.25p and a dividend of 7.6p per share.
With the recent failure of the Albemarle & Bond pawnbroking business it has shown up how maintaining a strong balance sheet is so very important. The sector remains highly fragmented but Ramsdens remains confident in its offer and the repeat business from its customers.
This group has a very good cash generation. It has a well-invested branch network, backed up by a good IT system. Importantly it has a large, growing and high repeat customer base, and to my mind that all adds up to a very attractive business and investment model.
Brokers Liberum Capital currently have a Buy rating on the shares, looking for 248p. I would agree with their view and, with the shares now at 204p, make my Target Price a rounded 250p by the end of next year.