S & U plc: the credit they deserve

By | September 28, 2017

Some investors complain that with the markets so high one can’t find good value investing ideas. I disagree.

The Business

S&U (will be referred to as SUS, like its London stock ticker) is a non-prime hire-purchase motor finance and specialist lender. Simply put, it lends people money so that they can buy cars. Started as a small trading business back in 1938 it went through a few changes over the years from selling pans and pots, to home loans to car finance and bridging finance. The home lending business had been sold in 2015 and since then the company has been focused on car finance as well as on a small bridging finance pilot.

The non-prime-car-finance business, Advantage, was started in 1999. Throughout the various crises that came upon the world during that time, this business managed to put down an impressive 17-year streak of profit growth. The bridging finance operation, Aspen, is still new and tiny.

The company’s chairman, Anthony Coombs, is the grandchild of the company’s founder. The Coombs family still holds 44% of the company. S&U has that feature about it that I really like—an owner-operator with good track record and a lot of skin in the game. Another 20% of the shares are held by Wiseheights, which is a company that is operated to benefit Jewish causes and its main asset is SUS’ shares. The Coombs family takes decent (some would say high) salaries of about £330k/year but nothing too extravagant, their main fortune lays with the shares of S&U and as such, investors and the family are in the same boat.

The Industry

Anyone with capital—and nowadays there are many “anyones”—can enter this business. All you need is some equity and you can start lending. As I learned from our successful investment with Credit Acceptance in the US, while entry barriers are really low, barriers to success—especially over the long run—are many.

If I were to summarize the business model in one sentence it would be “borrow at 4%, lend at 29%, and count the money.” However, things are not that simple.

In the finance business, especially when the interests of managers and owners diverge, there is a big temptation to inflate earnings and revenues over the short term. It takes a lot of discipline to insist on pricing your product for profit and not be afraid to lose business to an irresponsible competitor. Like J.P Morgan said “nothing so undermines your financial judgement as the sight of your neighbor getting rich.” It takes character to succeed in this business. Almost 18 years of rising profits, in good and bad times, as well as having skin in the game leads me to believe that the management team here is very capable and knows how to succeed in this business.

Since banking regulations have tightened following the financial crisis, many lenders have left the non-prime car lending arena and non-bank players in this industry have seized the opportunity. There are two main ways to finance a vehicle: Personal Contract Purchase (PCP) and Hire Purchase (HP). SUS is involved exclusively in the HP space and does not have any PCP exposure. You can read more about those types on various online sources but to make things simple, HP means that SUS buys the car and then rents it to the customer throughout the loan period after which, for a small fee, the borrower can obtain ownership on the car.

I recommend readers to read my Cambria post for more information about the car market in the UK. Bear in mind that SUS lends against cars that are 3-4 years old so while new vehicle count peaked, the target market for SUS is still in growth mode.

A few words about the market size and SUS’ market share: In 2016 there are 8.2m used car transactions. Out of those who purchased, there were 1.25m point of sale consumer used car finance deals. SUS underwrote 20,000 of those 1.25m deals, which means that it has a meager 1.6% of the total market. No matter how you slice and dice it (e.g. looking only at non-price etc.) the company has plenty of room to grow many years into the future.

Lastly, it is important to notice that the company is channel agnostic and whether the deal is done through brokers on the point of sale or through the internet does not matter much so disruption isn’t a big risk here.

The Inner Workings

There are 32 million people who are working in the UK. 12 million of whom have some impairment on their credit record. These impairments range from not paying the mobile phone bill to defaulting on loans. SUS’ average loan size is ~£6,000 and that will usually buy the customer a very good quality 3-4-year-old car that will last about five years and during that time it will serve the consumer very well. They like to lend against cars that have good fuel economy and are cheap to insure and maintain.

In the UK, lending at the dealerships is done mainly through brokers (85% brokers, 5% refinance, 10% direct). The brokers have incentive to close the financing but in the UK a broker that cheats will very quickly lose business as bad loans show up very fast in this business. So what keeps the dealers’ good behavior is the fact that they won’t be able to get away with passing bad business to the lenders. On top of that, I believe that the fact that SUS has its owners with boots on the ground ensures that the brokers know that SUS has long memory unlike other finance companies that experience high staff turnover and have short “institutional memory.”

While all players in this space have access to the brokers and to the same data sources that are used to make a decision, SUS uses its experience on top of that to find spots to lend where they know other financiers won’t go. To put that into numbers, SUS gets about 65,000 applications per month. 30% of those are approved in principle after 9.5 seconds by an automated system. However, out of those 20,000 applications, SUS will underwrite ~1700, or 3% of the total. As you can see, there is a lot of business to be done and SUS is very selective when it comes to lending.

Both of their main competitors aren’t focused solely on car finance and MoneyBarn, owned by Provident Financial has its fair share of trouble. The other competitor is Moneyway, which decided to pull out of the car subprime lending (not out of non-prime though) and has other segments in its business.

SUS usually lends about 90% of the car’s value. If the price of used cars drops it affects SUS as it repossesses some of the cars that it lends against. However, when prices drop, the consumer usually does not think about the value of the car in terms of the reference price but rather the utility value of the car. That is, they need a car to get to and from work etc. Also, if the customer decides to default, on top of the fact that his credit might degrade (remember, they do non-prime lending and not subprime so customers have something to lose when they default) SUS can still go after that customer for the rest of the loan’s balance!

Here is an example for what the company does (taken from company’s presentation):


One would expect a company with such characteristics to trade at a high PE that reflects the 20% growth that this business has been posting and the high-quality management. It indeed traded at around 16 times earnings until this ratio deteriorated to less than 10. The financial statements are pretty straightforward and easy to read, you can see them all here.

The company can easily earn north of 200p/share this year and given the current share price at the time of this writing (1982p/share) reflects a PE of less than 10, as I mentioned. Please note that unlike other companies, this company doesn’t adjust earnings. These are IFRS numbers, plain and simple.

Put the PE of 10 in perspective of 20% growth per annum, low gearing, high quality management with skin in the game and you get yourself a pretty bargain that can compound for many years in the future.

While there is no exact way to estimate intrinsic value, I suggest the following valuation. Company that shows high returns on equity, has a consistent track record of growth and is well-managed deserves a PE of 15. Indeed, the stock had received this multiple before Brexit occurred. If earnings will grow from the current ~200p/share base another 15-20% we are looking at earnings of ~235p in a year from now. Apply PE15 on that number and that gets us to ~3500p/share, which is 80% above the current price. While we are waiting for that, we enjoy a dividend yield of 5%, and growing.

This company’s volume is such a low percentage of the total market that it has a long growth runway and the impact of the company’s execution is much stronger than any macro trend as evidenced by impeccable track record during both good and bad times.

I don’t want to make this post highly technical, but it is worth mentioning that the company is very conservatively financed with total borrowing of 80m out of a balance sheet of £231m, out of which are £227m are receivables from customers (after loan loss provision). This is another “symptom” of a good and responsible management.

Looking at the stock chart below will make you wonder…

What happened in mid 2016 that made the share price drop from 2600 to 1900? Brexit. Many of the post-Brexit drops in stocks already corrected themselves, but for some reason, this didn’t happen for SUS. Meanwhile, the business progressed and PE shrank both due to the share price decline and thanks to increased profits. The Chairman referred to it in one of the trading updates:

Despite widespread assumptions of “post Brexit gloom“, consumer appetite for credit, partially reflecting a robust labour market, continues unabated. This apparent contradiction has been recently reflected, for both S&U and for others in the speciality finance sector, in what I view as an unjustified decoupling of S&U’s performance and prospects and our stock-market valuation. I am confident that our ambition and constant striving for the highest standards of service for our customers will be reflected in the growth, performance and value of the Group.

Nuff said.


  • Recession: the company earned respectable return on capital during the GFC, you can see the financial statements for Advantage, from the tough years here. That’s a relief.
  • Loan provisions are going up: the chairman referred to it in the last set of results and mentioned “risk-adjusted yield” and “good interest rates” which means, that similarly to CACC in the US, the company prices the loans while taking higher losses into account.
  • Regulations: this is always an unknown but the company is highly involved in a few regulatory bodies and seems to have its finger on the pulse.

The scariest risk is always the “unknown unknowns”, I wish I could write about it.

I’d love to hear your comments to this investment idea.

Disclosure: I hold a position in the shares of SUS. This isn’t an investment advice, just a discussion for the sake of sharing and learning.



Category: SUS

14 thoughts on “S & U plc: the credit they deserve

  1. Micky

    Thanks for the post.

    May I ask, where does the imminent rise of cheap autonomous taxis factor into your thesis? Do you have a strong grasp on the timeline and magnitude of the impact that auto-taxis will have on private car ownership in general, and non-prime car finance in particular?

    A-priori, I’d expect consumers of non-prime car finance to be especially sensitive to the availability of a low-cost alternative, because they’re probably not very wealthy. So not only can we expect – at some point, I think within 10 years – that many people would rather hail (or share!) a cheap autonomous taxi rather than own a car; Non-prime financing might be particularly vulnerable.

    So I expect the industry to go into a red-ocean crisis within a decade, possibly less. Until then, the anticipated crisis can weigh down the stock price, until eventually the future arrives and growth becomes negative.

    1. Yaniv Uliel Post author

      Hi Micky, thank you for the comment. What you are saying makes sense and each investor should judge about how imminent this threat is. Since you asked, I guess are expecting to hear my thoughts about it, but I don’t think high of my future-telling skills and neither should you. But before I share my thoughts, here is what a smart old man from Omaha said about this topic:

      “If I had to take the over and under [bet] 10 years from now on whether 10 percent of the cars on the road would be self-driving, I would take the under, but I could very easily be wrong”

      And he backed it with money, he recently purchased car dealerships in the US, has a big investment with GEICO, GM etc.

      As for me, I tend to align with Buffett on that and generally speaking, I think that nowadays people tend to overestimate the changes that technology will bring upon us and underestimate the barriers for widespread adoption of such technologies. On top of the threat of smart autonomous cars you are hearing threats to the manufacturing sector from 3D printing, the broadband providers from 5G (3G was first a threat, it didn’t happen, then 4G was, and now it 5G), chemical drugs will be replaced by biological smart medicine and so on. There has been so much of that going on lately. While I try not to underestimate disruptive threats (Amazon for instance) I think that people today tend to overestimate many of those threats.

      So you are saying two things:
      1. self-driving cars will be very common in a short time
      2. if #1 happens, then car ownership will meaningfully decline to levels that can hurt S&U

      Let’s look at these two things:

      While I believe that the end game that you described is inevitable, I think that the path to get there will be way longer than most people think. 17 years ago people used to think that by 2020 cars would be self-driving. Now it is clear that this won’t be happening. There are so many videos of self-driving cars online but in field tests in real conditions they just don’t cut it. For instance, I read an article about a self-driving car that stopped in the middle of the road because the bus in front of it had an advertisement that had a picture of a wall. The legal framework for self-driving cars barely exists and answers to questions such as who does the robo-driver choose to kill if the only two options it had were person A or person B were barely debated.

      I can give you another example from the subway system in Singapore. Just to put things in perspective, it is mostly underground, there are only trains moving on the rails (no intersections with roads etc.), it is mostly flat and basically, it is as easy as it gets for a robo-driver to handle. Yet, Singapore had to invest a fortune to upgrade the signaling system and battled with so many technical issues and travel delays to get it to work reasonable well. Still today, in the two busiest subway lines in Singapore, there are drivers behind the “wheel”. The two other lines are autonomous and being remotely controlled. If such a thing that on its surface looks as simple as it gets took so long to sort out in recent years, I can only imagine how far away is a technology that can drive a car on the road, in different weather conditions, different road conditions, pedestrians walking around, other cars driven by human drivers doing stupid things and so on. If trains that have a dedicated exclusive infrastructure took so long to work well in practice, it seems to me that cars will take a lot longer.

      Also, right now all we hear is good news about progress that is being made in this field. When those cars will go on the road in real conditions and start to kill people (as human drivers do too) suddenly things won’t be so easy. It is very easy for me to see this technology goes on and off pilot programs several times during the debugging process of it in real-life conditions. And each iteration like that can take years. Just like getting the FDA to approve a new drug. If your new drug killed people in clinical trials it would take you years to get back on track. The same will be here.

      I believe that right now the technology is good in theory but is very far away from being practically deployable. As of now, it is mainly good for showing it to investors in laboratory conditions or to produce short YouTube videos of cars driving themselves in real conditions with an engineer in car.

      Maybe I will prove wrong, I’m more than willing to side with Buffett on how fast these changes will occur.

      As for the second point: even if self-driving cars become prevalent it is far from clear that this will make car ownership redundant. For instance, in Singapore today you have Uber and Grab everywhere. If those Uber cars were self-driving it still wouldn’t have changed the choice that people make to own a car. And they do make that choice even now that using Uber is way cheaper than owning a car. If I lived somewhere in the US and I had a 50-minute drive to the office everyday I would still want to have my self-driving car so I can put my staff in it, have it always available for me etc. One more thing, the customerד of this company aren’t only in the bottom 5% of the population like you may have hinted. Out of 32m drivers in the UK 12m have impaired credit history so we are talking about almost 40% of the drivers here and SUS lends to about 20,000 of those a year. To me, I think this is a safe enough bet.

      1. Micky

        Thanks for sharing your thoughts. I appreciate it.

        Some of your points make sense to me so I won’t debate them. I’ll add two notes:

        – first, I wouldn’t worry about “who should the robot kill” regulations. I work for an autonomous-vehicles company, and I’ve never heard my fellow engineers worrying about such questions. The robo-driver’s objective will be “kill as few people as possible, placing equal value on each person’s life”. Really, I’m sure of it. It probably won’t even come to that – it’d be more like “hit the brakes if a collision is imminent”. The cost-benefit analyses are not as detailed as some people imagine. R&D is expensive, and the effort is spent elsewhere.

        – I agree that the underground railway system should be much easier to automate. But the R&D marketplace for such systems might not be as competitive and the investments, I suspect, are not nearly as large – there’s much less value to be gained from mass-transit automation, since the ratio of drivers to passengers is much smaller. This is just a speculation on my part, though, I haven’t checked how intense the competition or how large the investments were.

  2. Noam

    Another great post and a great idea. Thank you yaniv. Hope you will write more!

  3. Boomshiko

    Thank you for the great idea and a well written post.
    Just one question – I saw that the company has preferred stocks that are entitled to receive a 31.5% of the dividends (but has no voting rights). You did not count these shares while calculating the market cap of the company. Can you explain why?


    1. Yaniv Uliel Post author

      I’m happy you enjoyed it.

      As for the preference shares, you can see the details on the financial report. It is not 31.5% of the dividends. It is a rate of 31.5% on the outstanding amount of the 31.5% preference shares and it is deducted as financial expense in the P&L (see note 7 to the annual report). As for the 6%, this is even more negligible, they are written on the balance sheet as a 200k liability and as such the holders of these notes receive 12k out of the total dividend per year (see note 11 to the financial statement). I hope that helps.

  4. lawrence

    Hi Yaniv,

    First of all, it was a straight forward, concise write up of S&U.

    My interest in this company was the result of 1) analysing and loving Credit Acceptance 2) thumb sucking whilst watching Credit Acceptance doubled from the end of 2016 3) trying to find an equivalent of CACC.

    What’s interesting here is that the interest rate that S&U charges is even higher than those of Credit Acceptance! How sustainable is that, any thoughts?

    Anyhow, would love to connect to discuss future ideas.

    Warm regards,

    1. Yaniv Uliel Post author

      Hi Lawrence, thank you for your comment.

      Indeed, the interest on SUS’ loans is higher than those of CACC. Each market has its dynamics and these are the rates in the UK market, Moneybarn lends at similar rates, if you look online you’ll even see that Moneybarn lent at 40%+ rates.

      That said, there is something important to notice in the case of subprime car lending and we learned this during our conversations with CACC’s management. We, as investors, get scared at the thought of lending money at, for instance, 25%/year because it is very high and we see it as a headwind that we have to overcome. However, those who apply for subprime car loans don’t see things that way. Without the car they won’t be able to go to work etc. If you think of a $10k loan and assume an interest rate of 30%/year (I’m simplifying the calculations a bit in order to be brief) then the interest cost is $3k/year. If this is your annual cost and it allows you to take a job that pays you $25,000 a year then suddenly it doesn’t look so bad. Also, part of this cost is to repair your credit score because once you take this loan and repay it properly, your credit score goes up. So while the %-age of interest rate seems very high, it is not unsustainable for people in this bracket who see the car as a necessity.

      Let me know your thoughts…

      1. lawrence

        Hi Yaniv,

        Great to hear from you!

        I’m still trying to understand the industry and competitive dynamics for S & U.

        In US, Credit Acceptance has this genius model of pooling the loans from dealers and making dealers share the profit and loss of the pool. With that we get aligned interest. In some ways, CACC is like an insurance company underwriting and spreading out the risks across US. Competition wise, Credit Acceptance is like an island of its own (competition is just everywhere, but CACC just move forward anyway) due to its forecasting abilities and discipline culture.

        As for S & U, it gets its loan from brokers. So how’s the industry dynamics different based on your understanding on both UK and US subprime industry? And how’s the competitive dynamics in UK market like? Rational or irrational? Is capital tight or plentiful?

        So far, my thoughts on S & U are as follows:
        1) Long history of providing credit to niche markets – guess they know their stuff well
        2) Seems like it has good capital allocation – selling the home credit business to refocus capital on auto is a no brainer decision, in my opinion.
        3) Owner operator structure
        4) They are providing a necessary product (its a by product of the credit rating system), and unless there is significant change in this system, their product will remain relevant.
        5) Looks like a long long runway to me, and the company can grow profit 5-10 times!
        6) Balance sheet is so strong – CACC levered like 2.5 times equity!

        Risk – im just thinking about irrational competition and management becomes complacent or starts doing dumb stuff. (thoughts on this?)

        Hope to hear from you.


        1. Yaniv Uliel Post author

          As you were asking about industry dynamics, this came out yesterday:

          Trouble at one of your two big competitors is always good news.

          You are 100% right when you say that CACC’s model is much stronger and provides a better alignment of interests among all parties concerned when a loan is underwritten (dealer, broker, lender, consumer). When I spoke to the company I asked them just that. While I won’t share everything that was said, there is a weaker alignment of interest in the case of SUS compared to CACC. But the UK market is a bit different in the way that the brokers who connect the lenders with the customers have incentives to stay in the game. That is, the main concern is that the car will break down and then the customer won’t pay the loan. If a broker does too much of that, it goes on a big database in the UK and this broker will soon be out of business. Similarly, if the broker feeds wrong data to the lender and default rates on loans that this broker generated are high, this broker will again find himself in a tough place. On top of that, SUS has a ton of experience that it build through the years and of course, the discipline of an owner-operator who really cares about the long-term performance of the business way more than about the next quarter’s results.

          As for the market overall, my impression was that in the UK it is more rational than in the US. The big banks moved out of that space and as I mentioned in the post, SUS’ two main competitors have their issues.

          As for the risks, I agree with you and I there are the other risks I mentioned on the post such as regulation or a bad credit cycle that while it probably won’t kill the company, would mean low returns for several years until problems are fixed.

          1. Lawrence

            Seems like provident is having a lot of trouble, but it’s auto finance still grew considerably.

            The Coombs family appears to care about its business with conservative approach. But they don’t write shareholders letter like Brett in CACC (it’s one of the best annual letters out there though, in my personal opinion). How do you rate S&U management in term of capabilities and also as culture stewards?

            On the subject that banks have avoided this business, my two cent thought is that the high risk in this business would increase their capital requirement, so they just avoided this business. What’s your research suggest? Or the banks are not allowed to participate in this market due to regulatory environment in UK?

          2. Yaniv Uliel Post author

            I think that the best test for the culture of the management is not the letters they write but the actions they take over time and the value they create or destroy. On that measure I think that Coombs family scores really really well. I’ve seen plenty of management teams that write shareholder letters that look better than Buffett’s but then when you look at their actions over long periods of time, they are anything but.

            As for the banks leaving the business, my understanding is the same as what your research suggests. The banks were not prohibited but the requirements made this business line a very-low if not negative-return business.

  5. Dan

    Hey, very interesting post. I have a question about your opinion about the competition.
    If I understand correctly, when a customer goes to a broker his details are filled in an online form and the broker receives different offers from lenders and offers the client what best suites him. So it’s not that SUS gets 65k offers a month and chooses 1700, SUS bids, mostly automatic based on the details in the form, for 65K and gets selected, probably based on the interest rate they offer, 2.6% of the time. So if new competition will enter the market, similar to the sub-prime auto lending in the US, and the new competitors will want to grow fast by taking big risks and offering low interest rates, SUS will be forced to either lower their standards or lose a lot of business.

    I understand that the current competitors aren’t doing it, and currently it seems like the competition is rational, but who says new players won’t jump in in the future? a player that wants to grow very fast, with low standards will easily take those 1700 customers that will surely choose the lowest payment possible.


    1. Yaniv Uliel Post author

      Thank you for your comment Dan. To my understanding, the process you described is accurate. The company receives applications, approves some of them and then underwrites a subset of what it approved. About 9% of what they approve eventually translate into new business and the other 91% either choose another financing option or end up not buying the car etc.

      As to the risk you mentioned, it exists here as it does in any lending or insurance operation. Matter of fact, the risk of irrational competition exists in almost any other industry. To estimate it I would look at incentives and make a distinction between different scenarios and incentives for bad behaviour now.

      1. Platform: if Netflix gets a customer and losses money on this customer then it could make sense because this customer gets Netflix closer to its endgame of having enough users and enough revenues to start producing free cash flow because they can spread the content costs over many users. So while that customer is not profitable today, it contributes to the overall goal of building a platform. That’s clearly not the case here because having more customers doesn’t change the profitability of a subprime lending business. In the subprime lending business, beyond a relatively small central cost base, there is almost no advantage to scale. So getting customers by underwriting bad loans doesn’t get that irrational player anywhere at all.

      2. Laugh now cry (much) later: in activities such as life insurance bad underwriting discipline tends to bite after many years have passed. So, in some cases where incentives are not aligned there could be a temptation to produce more revenue and profits today at the expense of big problems down the road (e.g. General Electric’s insurance book). However, underwriting a bad car subprime loan starts to bite very fast. If you don’t underwrite your business well you will start feeling the pain anywhere between one week to two years after underwriting the loan. Most of it after less than one year. Due to the nature of the “reward” of acting irrationally, I don’t think that anyone has an incentive to do foolish things here because unlike in the case of long term insurance, in subprime auto lending you get punished fairly fast for such behaviour.

      3. Your margin is my opportunity: S&U’s return of capital employed (ROCE) is around 15%. This profitability is decent but not crazy high as to attract a lot of competition. A competitor will probably take many years to reach that level of profitability because experience and discipline are key here. So this industry won’t attract the “fast money” type of people because there is no fast money to be made here and no one will enter this business for ROCE of 10% in a highly leveraged business where any mistake can topple you over. Moreover, S&U’s revenue base is BP90m. Not the kind of number that will make people want to go crazy and spend a lot of money to get a piece of the action.

      So, I believe that there is nothing to be gained by an irrational competitor whom might consider to enter this space and underprice these loans at low rates. Even if such a competitor will pop up, it won’t survive for very long given the nature of the business. An irrational competitor is certainly a risk, but it is one I’m willing to take in this case.


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