I know I said I’d follow up on HAT, but I’m still waiting for a few things to come together before I can post that; it’s still in the pipeline! Instead, today I’m looking at a company that I came onto while looking at HAT. If you know anything about the two companies, you’ll probably know why – Albemarle & Bond and H&T are extremely similar, and it goes far beyond them just being in the same industry, pawnbroking. I’ve written about them in comparison a couple of times, most recently here, but never in any great operational detail. In this post I’ll go into a little more depth in an attempt to find some more tangible insight into the shares. After all, stocks that are very similar make for interesting trading – it hints at all sorts of interesting arbitrage opportunities.
By way of a quick background on the industry, HAT and ABM are, as far as I can tell, the two largest dedicated pawnbroking groups in the UK, and by quite some margin. The Money Shop apparently has over 500 stores, but pawnbroking isn’t their main focus, and they appear to be the biggest high street alternative financial services chain. Pawnbroking itself is still quite a fragmented industry; the trade organisation, the National Pawnbrokers Association has a membership of 1,800. In HAT’s 2009 annual report, they estimate that there are 500 shops in the UK, with 1,000 more where pawnbroking is an ancillary service. If that’s true, in 2009 HAT and ABM between them represented about 40% of the stores. They now operate 370 between them, and the remainder appear largely to be small indies. Put bluntly – they’re big players, and they’ve grown similarly.
Walking the same path
If you want an indication of just how similarly they’ve grown, take at look at the following graphs:
They’ve both opened more or less the same number of stores every year for the last 8, and operating assets have increased similarly. I should note one thing that I do leave out of this comparison is Abermarle & Bond’s little gold buying outlets – of which they have 50. These are on short-term leases and don’t engage in the pawnbroking side of things, so I’ve left them out of this comparison, though they are trying to diversify them by engaging in other forms of financial services/lending, so they might stay and become a point of difference. If they’re unsustainable without the vanishing gold profits, ABM will get pulled back in line with HAT.
Marching to the same drum
Being in a similar industry, with a similar way of operating and having almost exactly the same scale means that operating performances are likely to be fairly closely correlated, too. While there certainly are differences between the two companies, let’s take a look at the broad directions- here’s an overview of their half-yearly profit over the last 9 halves. The reasoning behind the choice of interval is important.
Another fairly correlated set of figures.
As you can see, we haven’t had ABM’s first half 2013 results yet. I should say now that in both of my graphs, the dates used are actual calendar dates, not accounting dates – by 2013H1 I mean the first half of calendar 2013, and not the first half of a company’s year, which alters depending on their year end date. Now – why are comparisons between HAT and ABM so easy in this respect? It would be nice if both companies had the same year end date, since that’d mean we could compare apples with apples, but we have something almost as good – their year end dates are exactly 6 months apart. This means, by looking at one group’s interims against another’s final figures, we are looking at exact comparisons between the same actual dates. There are no fuzzy edges.
The flavour of icing
There are some differences between the two businesses that are noticeable, though, and they’re important – pretending they are one and the same might be a more justifiable long-term assumption, but management, business strategy and historical factors all conspire to make things more complicated than I’m implying. The bar chart below highlights this is in the best way I can think of – by showing gross profits broken down by their segments.
Luckily for us, gross profits are a nice comparator between the companies because of the similarities in scale – both companies have almost exactly the same operating costs (the costs of running the business and stores), so it’s differences in gross profit that feed through to the differences in bottom-line performance. I’ll address the easy one first – gold purchasing. ABM has, and has had, a greater exposure to gold. They opened 50 gold buying outlets, after all, and reading annual reports going back gives you a distinct impression that they were both more aggressive and perhaps more reliant on gold as a cornerstone of their strategy. This is interesting for us in an environment where the gold price is tanking.
Secondly, though, and more interestingly, ABM report higher profits in the pawnbroking segment. This is something I can’t explain, and I’ll come on to why it puzzles me so in a second.
As something of a mitigating factor for this two underperformances, HAT significantly outperforms ABM on retail – even more so when you consider that the pawnbroking scrap segment is essentially goods from the retail segment that are slow-moving/difficult to sell and so get melted down for scrap. I suppose you could argue that pawnbroking scrap should be lined up with the gold purchasing segment, since it’s linked to the gold price, but I don’t think it’s any more leveraged to that than pawnbroking is generally.
Other financial services, like cheque cashing, are areas both companies are pursuing as ways of diversifying and squeezing more out of their stores. I suspect these are growth areas, but they’re growth areas where they’re competing with the likes of Wonga, and this raises a lot of ethical and regulatory issues. I wonder how both companies will deal with this – I remember reading an OFT report into the alternative lending market, and while it was broadly quite positive on pawnbroking due to its lower rates and more transparent structure, it was extremely scathing of the whole payday loan shabang.
Anyway, here’s why I don’t get how ABM are able to earn a significant amount more than HAT on their pawnbroking segment:
The company’s pledge book is basically the loans it’s given out – just like a bank. ABM earn about 25% more on their pawnbroking segment with a pledge book about 35% smaller – an extremely significant outperformance. Perhaps ABM charge higher rates? Customer loyalty seems to be a big thing in pawnbroking, so maybe they’re just able to do so. I think there’s a more subtle explanation, though. Pawnbroking companies prefer for customers to either a) roll over their loans, granting them more business or b) come in and redeem their item by paying back the money they borrowed, plus interest. This means the company can avoid the lengthy retail/auction/scrapping process. In HAT’s case, I see from their 2012 annual report than redemption rates are pretty steady at about 76-77%. I can’t find figures on Albemarle & Bond’s reports, which is a shame, but I did find the following quote from their website:
…the industry average is 80% of items that are redeemed and our customers redeem above that.
HAT, for their part, say that falling redemption rates actually increase group profit at the moment, because of the strong price of gold.. though they do note that repeat business suffers, so they’d prefer to bring it up. It’s all a bit convoluted, but I think the lower redemption rate H&T have means that the items basically ‘shift’ through the segmental accounting to the retail/scrap bits, which explains why these segments report so much higher and pawnbroking so much lower. That’s my current best guess on the question.
A touch of deviance
I’ve always said I’m an investor and not a short-term trader, but I can’t help but wonder why ABM’s share price didn’t budge on the announcement of HAT’s results. We can expect their full year figures probably in the next month or so, and this’ll capture the half of the year when the gold price drop has been really precipitous. If, like me, you expect ABM to continue to be highly correlated with HAT – and expect them, too, to release figures down significantly on last year, you might wonder whether this is already priced in or not.
That’s a difficult question. Who can say that’s really priced into any stock?
What I do know, though, is that the market capitalisation of Albemarle & Bond currently sits at £79m, and they carry £50m of debt as of their most recent financials. This gives them an enterprise value of £129m. H&T Group are valued at £50m, and carry £34m of debt, giving them an EV of £84m – 35% less. Sure, it’s not an enormous difference, but I’m going to go out on a limb and say that I don’t think the market has reacted to the impact of H&T’s results on what ABM are likely to put out. I know it’s a devilish indulgence, and making short-term calls is for the reckless, but I think Albemarle & Bond will get hit on this year’s results. Don’t hold me to it – because for the long term, I provisionally like HAT, and similarities mean I like ABM too.
I just wonder if people are holding both HAT and ABM to unrealistic standards given the wider environment. There are plenty of positive things to be said about the business – but the expectation that both continue to pay out enormous dividends and rake in large gold-buying profits is rapidly slimming, and that short-term pessimism seems to be what did it for H&T’s share price.