Company Announcements

                                                                                                                                                                                     

29 March 2022

 

S&U plc

("S&U", "the Group" or "the Company")

 

PRELIMINARY UNAUDITED RESULTS FOR THE YEAR ENDED 31 JANUARY 2022

 

S&U plc (LSE: SUS), the motor finance and specialist lender, today announces its preliminary unaudited results for the year ended 31 January 2022:

               

Group Key Financials:

·      Profit before tax ("PBT"): £47.0m (2021: £18.1m) - average PBT over 2 years of pandemic is therefore £32.6m pa (2020: £35.1m)

·      Revenue increased by 5% to £87.9m (2021: £83.8m)

·      Group amounts receivable from customers at year-end increased by 15% to £322.9m (2021: £280.9m)

·      Group impairment charge of £4.1m (2021: £36.7m) - lower this year due to less utilisation of Covid related Jan 21 provisions, lower motor finance bad debt attrition and good collections in both businesses

·      Basic earnings per share: 312.8p (2021: 120.7p)

·      Final dividend of 57p per ordinary share to be paid on 8 July 2022 (2021: 43p)

·      Net Borrowings at £113.6m (2021: £98.8m) - gearing at 54.9% (2021: 54.6%)

 

Advantage Motor Finance Highlights:

·      PBT: £43.7m (2021: £17.2m)

·      Annual PBT reflects a lower than normal £3.8m forward looking IFRS9 impairment charge (2021: Covid impacted charge £36.0m) - this charge was £16.5m in 2020

·      Total annual collections at £203.9m (2021: £180.5m)

·      Annual net advances: £140.9m (2021: £102.6m) - new business quality good

·      Net receivables at £259.0m (2021: £246.8m) 

 

Aspen Bridging Highlights:

·      PBT: £3.4m (2021: £0.8m) 

·      Annual PBT performance underpinned by strong advances and repayments

·      Amounts receivable from customers now £63.9m (2021: £34.1m) with only 2 loans in default

·      369 new loan facilities in 5 years with 267 repaid up to 31 January 2022 and 102 remaining on live book

 

Audit - our new auditor, Mazars LLP, due to their internal capacity constraints, are still finalising their audit quality internal review processes which were due to have concluded ahead of our preliminary announcement. They have advised us that they anticipate formally issuing their Audit Opinion in the coming days. 

Anthony Coombs, Chairman of S&U plc stated:

"As the world reels from one crisis to another, it is apt to remember the words of Winston Churchill, our greatest war leader: "I'm an optimist - it does not seemtoo much use to be anything else". Like all successful businesses with a long history, S&U recognises that it must tailor its products and services and trim its operational tack to its economic, political and regulatory environment, over which it may have little control but to which it can nevertheless adapt and therefore thrive. Whilst this year's resounding results clearly show our, and most importantly our loyal people's, ability to do this, their work in preparing and priming the Group for both the opportunities and challenges now facing all of us, gives me a quiet but determined confidence in S&U's future."

 

 

Anthony Coombs	S&U plc	c/o SEC Newgate Communications
Financial Public Relations Bob Huxford, Molly Gretton, Max Richardson	SEC Newgate Communications	020 7653 9848
Broker  Adrian Trimmings, Andrew Buchanan, Rishi Shah	Peel Hunt LLP	020 7418 8900

A conference call presentation for analysts will be held on 29^th March 2022 at 11.00am

 

 

 

 

CHAIRMAN'S REVIEW

 

Introduction

In times scarred by the global pandemic, looming environmental disaster and now a war in Ukraine, anyone claiming to see the future with any certainty risks appearing a charlatan or a fool.  Hence, without possessing any supernatural powers of foresight, I am at least pleased to see that my prediction last year of "a return to S&U's habitual levels of success" in 2021 has indeed now come to pass.  Profit before tax for S&U plc this year is at £47.0m (2021: £18.1m) on Group revenue of £87.9m (2021: £83.8m).  Group net assets now stand at a record, £206.7m against £181.0m last year.

 

This excellent performance sees earnings per share this year at 312.8p per ordinary share (2021: 120.7p) the best in S&U's 84-year history.  The Group's traditional financial strength, excellent collections performance and receivables quality, mean Group Gearing remains at just 54.9% (2021: 54.6%).  Despite the unprecedented economic and social turmoil of the past two years, first through Covid, secondly its economic aftermath and rising inflation, and third, from the as yet unknown consequences of the Ukrainian War, these results show that S&U plc has emerged stronger than ever and primed for a new era of profitable growth.

 

Financial Highlights*

Profit before tax ("PBT"):	£47.0m	(2021: £18.1m)
Revenue:	£87.9m	(2021: £83.8m)
Earnings per share ("EPS")	312.8p	(2021: 120.7p)
Group net assets:	£206.7m	(2021: £181.0m)
Group gearing:	54.9%	(2021: 54.6%)
Group Treasury:	£180m of medium-term funding against £113.6m borrowings
Group total collections:	£294.3m	(2021: £214.3m)
Dividend proposed:	126p per ordinary share	(2021: 90p)

 

* key alternative performance measurement definitions are given in note 2.4 below

 

At Advantage, our Grimsby based motor finance business, the resilience of the business and the strength of its relationships with its customers is evidenced by a lower than normal loan loss provisioning charge for the year of £3.8m (2021: £36.0m; 2020: £16.5m) reflecting good collections and less utilisation of the impairment provisions made in the dark days of January 2021.  Thus, over the past two years of Covid, Advantage has been able to produce an average of over £30m annual profit, quite remarkably just less than 10% lower than in the previous two years.  This, despite a 20% fall in new car production and sales over the past two years, which has constrained supply in both the new and used car markets and hence constrained loan transactions.

 

At Aspen, our five-year-old property bridging operation, profits have surged ahead strongly over the past year.  Transaction numbers have risen by nearly 70% and book quality is at its best level ever. The reward is a record profit for the year of £3.4m (2021: £0.8m). 

 

S&U's remarkable ability to produce consistent and long-term growth rests on three pillars.  The first is the tenacity, hard work, imagination and ambition of our remarkable colleagues. All have adapted to Covid's disruption by using flexible and hybrid working to their advantage.  Around two-thirds of them have now returned to normal routines of office work, and all have embraced the real opportunities for uninterrupted concentration and focus that hybrid working can bring.  As Manchester City FC has so ably demonstrated, our staff may not always share the same pitch, but the whole squad can interchange for the benefit of all.

 

Second, they have used the pandemic period to set in place a raft of operational improvements which are making both Advantage and Aspen more competitive than ever.  New finance products have been introduced, sales channels diversified, both brand and digital marketing embraced, and customer communication automated and made more efficient.  All these and more are proof of the vitality and imagination of our staff, to whom, more than ever, I pay profound and respectful tribute.

 

Third, long experience has proved to us that successful lending businesses do not exist in a vacuum.  Both the attraction and affordability of all our products depend not only upon the financial health of our customers but on prevailing economic conditions.  In turn, these depend upon health of the British economy and in particular the motor and housing markets which we serve.  Currently, to put it mildly, the runes are mixed.  Whilst the labour market remains reasonably strong with low unemployment and rising wage rates, high utility prices, inflation and direct and indirect taxation undoubtedly threaten standards of living.

 

In the used car market, in which Advantage has so successfully operated for over twenty years, the dichotomy is seen in the 20% fall in new car production and sales over the past two years, contrasted to a robust 10% increase (at 1.361m) in the number of used cars financed at the point of sale (Finance and Leasing Association).  The fall in new car sales means that residual values for used cars remain very strong and has resulted in a steady 9% recovery in the used car finance market over the past year.  Happily, Advantage has out-performed the market, with the value of new loan advances up 37% this year and new loan transaction numbers up 26%.

 

In the housing market, of interest to Aspen Bridging, although market transaction numbers have remained subdued, house prices generally have risen over 10% over the last year. Although the market is now cooling slightly as interest rates rise to counter inflation and to finance two trillion pounds of government debt, their effect on dampening demand will be offset by the fundamental imbalance between housing demand and supply in most parts of the UK. Happily, like Advantage, Aspen has been able to outperform the market seeing new loan facility numbers increase by 69% over the past year.

 

In sum, current trends in both our businesses remain very encouraging with current new loans this financial year already beating budget.  It was our anticipation of this accelerating growth that S&U put in place an additional £50m of medium-term facilities last year.  These now total £180m on borrowings of £113.6m and may be augmented within the next financial year as further growth occurs, and the macroeconomic landscape becomes clearer.

 

Advantage Finance ("Advantage")

 

Following a first ever dip in profits last year, as Covid stormed the economy, Advantage Finance, our motor finance business, has produced a stunning come back performance.  Profits this year of £43.7m are against just £17.2m in 2021.  New loan transaction numbers, even in a market constrained by the supply of used cars are up by 26% on 2021.  On revenue of £78.9m, ROCE for the business was 19.4%.  Whilst it is true that these results have benefitted from a much lower than normal impairment charge, this partly reflected a superb performance in collections as our loyal and conscientious customers both maintained and improved their repayments.  Monthly live collections receipts reached a record £152.7m, 10% up on 2021.  These collections represented an average 93.21% of due (2021: 83.26%) and the year finished on a remarkable 98.25% of due in January.  They were made possible by Advantage's close and harmonious customer relations, responsible lending, the success of a new customer payment portal introduced last summer and, last but not least, by the professionalism and empathy of our customer facing teams.

 

Receivables quality was also bolstered by the strong used car values; this meant that both voluntary termination and bad debt numbers, and the losses arising from them were much lower than anticipated back in January 2021.

 

Although Advantage expects that new loan transactions will continue to grow this year, much will depend upon consumer confidence generally and the economic fall-out from the current crisis in Eastern Europe. Their prognosis has therefore been sensibly prudent with a return to increased growth forecast for the final third of this financial year, when used car availability is expected to have gradually  returned to more normal levels.

 

For the longer term, a number of marketing and branding initiatives have been introduced.  They will broaden the funnel of our new business, develop new affinity and consolidated partnerships and open direct channels to future customers.  Refining its renowned underwriting ability, Advantage continues to help customers improve their credit ratings and to serve them with the kind of finance product which helps them do so.  To this end Advantage has welcomed new credit reference providers and has partnered with digital specialists, as well as recruiting in-house marketing expertise.

 

Again, with an eye to the future, Advantage has this year increased its financing of electric cars.  Although electric vehicles currently only comprise about 3.5% of the UK car parc, the market is growing strongly.  Indeed 28% of new vehicles sold this year were either electric or plug in self-charge hybrids.  A working group has been set up to track the development of this market and we expect to be able to introduce more of our customers to it over the next few years.

 

 

Aspen Bridging

 

Aspen, our property bridging business set up in 2017, has produced record results and is fulfilling our ambitions for it.  Profit before Tax is a record £3.4m (2021: £0.8m) and year end net receivables have grown to £63.9m (2021: £34.1m).  New loan facility numbers in the year rose from 80 to 135 on gross maximum LTVs at a conservative 66% average.  Loans written were £112m this year (2021: £43m) well above budget.  Credit quality remains good.  102 loans were repaid last year, generating £77m of cash (2021: £29m).  Defaults are at their lowest ever and no actual realised losses have been incurred this year on the loan book.  This is a testament to Aspen's thorough, painstaking and rigorous approach to underwriting involving a personal visit to every property financed.

 

As the business develops, new products have been introduced.  Loans now range up to £5m per deal as, in the absence of flexible mainstream bank support, the refurbishment and small development market expands.  Last year saw Aspen trade very successfully within the Government's Coronavirus Business Interruption Loan Scheme (CBILS).  The burgeoning Buy-to-Let market has seen Aspen introduce a 'Bridge to Let' product which is proving attractive to smaller developers and investors.   Aspen anticipates further lending growth this year.  

 

Considerable investment has been made in staff development and recruitment.  New business development managers and Aspen's growing credibility within the broker community helped produce a record £27m gross loans in the final quarter of 2021/22.  As the business grows, so will staff numbers and their experience and professional qualifications. 

 

This year, although possibly muted in the light of macro-economic conditions, we expect the UK housing market to continue to grow both in value and in transaction numbers.  In the long term the continued mismatch between the demand for affordably priced housing and a relative dearth of supply will see that it remains so.  Aspen's budgets and aspirations responsibly reflect this.

 

Dividends

 

Together with Warren Buffett, the legendary American investor, we believe that shareholders' rewards should reflect the long-term view of the cash thrown off by the profits of the businesses they own.  We have reflected this at S&U in a longstanding dividend approach which aims at seeing dividends twice covered.  Taking the past two years as a whole earnings per share have averaged just over 216p thus implying a total dividend of 126p per ordinary share this year (2021: 90p).  Subject therefore to the approval of shareholders at our AGM on 26 May 2022, we propose a final dividend of 57p per share (2021: 43p).  This final dividend will be paid on 8 July to shareholders on the register on 17 June 2022.

 

Funding Review

 

At £113.6m at year end, net borrowings are well within our medium-term facilities of £180m.  Whilst Advantage's excellent debt quality and cautious underwriting saw it again generate cash last year, Aspen's growth absorbed nearly £30m of additional funds.  We anticipate that current facilities will give sufficient headroom for the anticipated organic growth in both businesses in the next year.  As usual these will be increased as required.

 

Governance and Regulation

 

The past 85 years of S&U's existence have obviously seen profound changes in the financial services industry.  Whilst technological change has been at the forefront, the most profound change has been philosophical, and one which could threaten the flexibility, development and success of the industry. Previously widely accepted notions regarding the success of the free enterprise system in harnessing the energy, motivation and multiple decisions of millions of consumers and producers for the benefit of all, are no longer widely held.  As Milton Friedman, and even the great Adam Smith, lauded the ability of markets, flexibly regulated to benefit the common good and improve standards of living generally, current trends are increasingly more interventionalist, judgemental and even "woke".  As Lord David Frost recently pointed out on his resignation from the government, this has resulted in the mistaken and dangerous assumption that profit-making inevitably risks being at the expense of consumers, and not for their benefit.

 

All this has resulted in a tsunami of regulation, sometimes ill-coordinated and even contradictory, apparently designed to remove all risk for consumers irrespective of circumstances.  This has two serious consequences. 

 

First, it restricts innovation, robust competition and therefore economic growth.  As Professor Tim Congdon recently pointed out it is unlikely to be a coincidence that the UK growth rate of 3% per annum in the more lightly regulated 1960's, has given way to a feeble 0.9% per annum rate between 2019 and 2020 in these more consumerist times.

 

Second, waves of new regulation, often without any parliamentary or even ministerial scrutiny or oversight, have led to complication and uncertainty.  The Consumer Credit Act, the principal legislation for the financial services industry, is now over 50 years old and has been constantly overlaid with statutory instruments, codes of conduct and new consumer duties.  In the words of the Finance and Leasing Association, these have ceded control over regulation to the regulators themselves.  The industry's policemen have effectively become its law makers.  Now this process risks even further confusion by the proposed introduction of a new Consumer Duty, which (whilst laudably aiming for good customer outcomes) is so subjective that it risks, according to the Finance and Leasing Association, giving "no certainty on what good compliance looks like from the outset."

 

S&U has always put customers' interests first.  This is not only morally good business but is commercially vital in nurturing long-term customer relationships and the earnings derived from them.  Indeed S&U's Mission Statement - "TRUST" - encapsulates this.  Fortunately, Advantage Finance enjoys an excellent and mutually respectful relationship with the Financial Conduct Authority; building on this will necessitate a greater certainty and clarity over what constitutes good conduct and compliance.

 

More widely, S&U's habitual responsibilities for the world around it are itemised in its Environmental, Social and Governance Responsibilities ("ESG").  How we fulfil these, are detailed, without any virtue signalling, in later sections on S&U's Corporate and Social Responsibility and in our Section 172 Statement.  Nevertheless, we maintain our conviction that our principal responsibilities are to our customers, our staff and our shareholders.  This coincides with a recent survey by Henley Strategy, reported in the Times, which showed that 74% of the British public now felt that prioritising staff and customers should take precedence over a focus on wider social and environmental issues.  Our pragmatic approach means that the last year has seen recruitment at Aspen fully reflect the ethnic diversity of its West Midlands base; a selection process for a new main Board Director which involved a majority female shortlist; the formation of a new Group wide working party on Eco-strategy to oversee our response to becoming carbon neutral by 2030, including the promotion of Advantage's offer for electric vehicles. As evidence of intent, many of the Board of Advantage now either possess or have ordered an electric vehicle.

 

Most of all, in these turbulent and ever-changing times, we will continue to insist that our ESG agenda is driven by common sense and not political fashion.

 

Finally, it gives me great pleasure to welcome to our Board this year two new members. The first is my cousin Jack who replaces Fiann Coombs, whom I warmly thank for the wise contribution he has made to our proceedings over the past decade. As evidenced by his work at Aspen, Jack thoroughly deserves this recognition, will continue the founding Coombs family's deep involvement with S&U and add boundless energy and, dare I say it, youth to our Board deliberations. The second, and latest appointee to the Board is Jeremy Maxwell, whom we were delighted to appoint earlier this year after an exhaustive and very thorough process, and who brings considerable talent, wisdom and experience in marketing, particularly in the Business to Consumer field, at Wolseley UK, Carpetright, B&Q, Screwfix and Mothercare.

 

Current Trading and Outlook

 

As the world reels from one crisis to another, it is apt to remember the words of Winston Churchill, our greatest war leader: "I'm an optimist - it does not seem too much use to be anything else". Like all successful businesses with a long history, S&U recognises that it must tailor its products and services and trim its operational tack to its economic, political and regulatory environment, over which it may have little control but to which it can nevertheless adapt and therefore thrive. Whilst this year's resounding results clearly show our, and most important our loyal people's, ability to do this, their work in preparing and priming the Group for both the opportunities and challenges now facing all of us, gives me a quiet but determined confidence in S&U's future.

 

 

Anthony Coombs

Chairman

28 March 2022

 

 

 

 

 

1.         SHAREHOLDER INFORMATION

1.1 Preliminary Announcement

This unaudited preliminary announcement does not constitute the full financial statements prepared in accordance with International Financial Reporting Standards (IFRS). The unaudited preliminary announcement was approved by the Board of directors on 28  March 2022.The Company's Annual Report will be finalised subsequent to this preliminary unaudited results announcement. The figures shown for the year ended 31 January 2022 are not statutory accounts within the meaning of section 435 of the Companies Act 2006.

The figures shown for the year ended 31 January 2021 are not statutory accounts. A copy of the statutory accounts has been delivered to the Registrar of Companies, contained an unqualified audit report and did not contain an adverse statement under section 498(2) or 498(3) of the Companies Act 2006. A copy of this preliminary announcement will be published on the website www.suplc.co.uk. The Directors are responsible for the maintenance and integrity of the Company website.  Legislation in the United Kingdom governing the preparation and dissemination of financial statements differ from legislation in other jurisdictions.

 

1.2 Annual General Meeting

The Annual General Meeting will be held on 26 May 2022 and further details of arrangements will be published in the AGM notice.

 

1.3 Dividend

If approved at the Annual General Meeting a final dividend of 57p per Ordinary Share is proposed, payable on 8 July 2021 with a record date of 17 June 2021.

 

1.4 Annual Report

The 2022 Annual Report and Financial Statements and AGM notice will be displayed in full on our website www.suplc.co.uk in due course and also posted to those Shareholders who have still opted to receive a hardcopy. Copies of this announcement are available from the Company Secretary, S & U plc, 2 Stratford Court, Cranmore Boulevard, Solihull B90 4QT.

 

2.         KEY ACCOUNTING POLICIES

The 2022 financial statements have been prepared in accordance with applicable accounting standards and accounting policies - these key accounting policies are a subset of the full accounting policies.

 

2.1 Basis of preparation

 

As a listed Company we are required to prepare our consolidated financial statements in accordance with international accounting standards in conformity with the requirements of the Companies Act 2006 and International Financials Reporting Standards (IFRS) as adopted by the United Kingdom. We have also prepared our S&U plc Company financial statements in in conformity with the requirements of the Companies Act 2006 and International Financials Reporting Standards (IFRS) as adopted by the United Kingdom. The financial statements have also been prepared in accordance with International Financial Reporting Standards as issued by the IASB. These financial statements have been prepared under the historical cost convention. The consolidated financial statements incorporate the financial statements of the Company and all its subsidiaries for the year ended 31 January 2022. As discussed in the strategic report, the directors have a reasonable expectation that the Group has adequate resources to continue in operational existence for the foreseeable future. Accordingly, they continue to adopt the going concern basis in preparing the annual report and accounts.

There are no new standards which have been adopted by the group this year which have a material impact on the financial statements of the Group.

 

At the date of authorisation of this preliminary announcement the directors anticipate that the adoption in future periods of any other Standards and interpretations which are in issue but not yet effective, will have no material impact on the financial statements of the Group.

 

 

2.2 Revenue recognition

Interest income is recognised in the income statement for all loans and receivables measured at amortised cost using the constant periodic rate of return on the net investment in the loans, which is akin to an effective interest rate (EIR) method. The EIR is the rate that exactly discounts estimated future cash flows of the loan back to the present value of the advance and hire purchase interest income is then recognised using the EIR.  Acceptance fees charged to customers and any direct transaction costs are included in the calculation of the EIR.  For hire purchase agreements in Advantage Finance which are classified as credit impaired (i.e. stage 3 assets under IFRS 9), the group recognises revenue 'net' of the impairment provision to align the accounting treatment under IFRS 16 with the requirements of IFRS 9 and also with the treatment adopted for similar assets in Aspen. Revenue starts to be recognised from the date of completion of the loan - after completion hire purchase customers have a 14 day cooling off period during which they can cancel their loan.

2.3 Impairment and measurement of amounts receivable from customers

All customer receivables are initially recognised as the amount loaned to the customer plus direct transaction costs. After initial recognition the amounts receivable from customers are subsequently measured at amortised cost.

The directors assess on an ongoing basis whether there is objective evidence that a loan asset or group of loan assets is impaired and requires a deduction for impairment. A loan asset or a group of loan assets is impaired only if there is objective evidence of credit impairment as a result of one or more events that occurred after the initial recognition of the loan. Objective evidence may include evidence that a borrower or group of borrowers is experiencing financial difficulty or delinquency in repayments. Impairment is then calculated by estimating the future cash flows for such impaired loans, discounting the flows to a present value using the original EIR and comparing this figure with the balance sheet carrying value. All such impairments are charged to the income statement. Under IFRS 9 for all stage 1 accounts which are not credit impaired, a further collective provision for expected credit losses in the next 12 months is calculated and charged to the income statement.

Key assumptions in ascertaining whether a loan asset or group of loan assets is impaired include information regarding the probability of any account going into default (PD) and information regarding the likely eventual loss including recoveries (LGD). These assumptions and assumptions for estimating future cash flows are based upon observed historical data and updated to reflect current and future conditions. As required under IFRS9, all assumptions are reviewed regularly to take account of differences between previously estimated cash flows on impaired debt and the eventual losses.

 There are 3 classification stages under IFRS9 for the impairment of amounts receivable from customers:

Stage 1: Not credit impaired and no significant increase in credit risk since initial recognition

Stage 2: Not credit impaired and a significant increase in credit risk since initial recognition

Stage 3: Credit impaired

For all loans in stages 2 and 3 a provision equal to the lifetime expected credit loss is taken. In addition and in accordance with the provisions of IFRS9 a collective provision for 12 months expected credit losses ("ECL") is recognised for the remainder of the loan book. 12-month ECL is the portion of lifetime ECL that results from default events on a financial asset that are possible within 12 months after the reporting date.

In our Motor Finance business, all loans 1 month or more in contractual arrears are deemed credit impaired and are therefore included in IFRS9 stage 3. This results in more of our net receivables being in stage 3 and the associated stage 3 loan loss provisions therefore being higher than if we adopted a more prime customer receivables approach of 3 months or more in arrears. Our approach of 1 month or more in contractual arrears is based on our historic observation of subsequent loan performance after customers fall 1 month or more in contractual arrears within our non-prime motor finance customer receivables book. The expected credit loss ("ECL") is the probability weighted estimate of credit losses.

A PD/LGD model was developed by our Motor Finance business, Advantage Finance, to calculate the expected loss impairment provisions in accordance with IFRS9.  Stage 1 expected losses are recognised on inception/initial recognition of a loan based on the probability of a customer defaulting in the next 12 months. This is determined with reference to historical data updated for current and future conditions. If a motor finance loan falls one month or more in contractual arrears, then this is deemed credit impaired and included in IFRS9 Stage 3. There are some motor finance loans which are up to date with payments but the customer is in some form of forbearance and we deem this to be a significant increase in credit risk and so these loans are included in Stage 2. As a result of the uncertainty over the performance of customers who were granted a payment holiday as part of the Government and FCA support measures as a result of the Covid pandemic  and have also either requested a second payment holiday or have had a previous payment delinquency, we

 

have assessed these customers to have a significant increase in credit risk and they are therefore included in Stage 2. This is why the volume of customers in Stage 2 increased at 31 January 2021. However, if a customer's payment holiday finished more than 12 months ago and they are unimpaired 12 months later then an account will not be in stage 2 as the customer's post payment holiday record now indicates low risk at the reporting date. This is why the volume of customers in stage 2 reduced at 31 January 2022. As we do not have historical data for such customers, we made an assumption on the loss rates associated with such customers by reference to relevant Stage 3 loss rates. Further sensitivity over this estimation uncertainty is provided in note 2.5.

 

As required under IFRS9 the expected impact of movements in the macroeconomy is also reflected in the expected loss model calculations. For motor finance, assessments are made to identify the correlation of the level of impairment provision with forward looking external data regarding forecast future levels of employment, inflation, interest rates and used car values which may affect the customers' future propensity to repay their loan. The macroeconomic overlay assessments for 31 January 2022 reflect that further to considering such external macroeconomic forecast data, management have judged that there is currently a more heightened risk of an adverse economic environment for our customers and the value of our motor finance security. To factor in such uncertainties, management has included an overlay for certain groups of assets to reflect this macroeconomic outlook, based on estimated unemployment, inflation and used vehicle price levels in future periods. Further sensitivity over this estimation uncertainty is provided in note 2.5.

Other than the changes to the approach mentioned above, there were no significant changes to estimation techniques applied to the calculations used at 31 January 2022 and those used at 31 January 2021.

PD/LGD calculations for expected loss impairment provisions were also developed for our Property Bridging business Aspen Bridging in accordance with IFRS9.  Stage 1 expected losses are recognised on inception/initial recognition of a loan based on the probability of a customer becoming impaired in the next 12 months. The Bridging product has a single repayment scheduled for the end of the loan term and if a bridging loan is not granted an extension or repaid beyond the end of the loan term then this is deemed credit impaired and included in IFRS9 Stage 3. Due mainly to the high values of property security attached to bridging loans, the bridging sector typically has lower credit risk and lower impairment than other credit sectors.

Assets in both our secured loan businesses are written off once the asset has been repossessed and sold and there is no prospect of further legal or other debt recovery action. Where enforcement action is still taking place loans are not written off. In motor finance where the asset is no longer present then another indicator used to determine whether the loan should be written off is the lack of any receipt for 12 months from that customer.

 

2.4 Performance Measurements

i)  Risk adjusted yield as % of average monthly receivables is the gross yield for the period (revenue minus      impairment) divided by the average amounts receivable from customers for the period.

           ii)  Rolling 12-month impairment to revenue % is the impairment charged in the income statement during the 12 months prior to the reporting date divided by the revenue for the same 12-month period. Historic comparisons using this measure were affected by the adoption of new accounting standards IFRS9 and IFRS16 and risk adjusted yield is considered a more historically comparable guide to receivables performance.

iii) Return on average capital employed before cost of funds is calculated as the Operating Profit divided by the average capital employed (total equity plus Bank Overdrafts plus Borrowings less cash and cash equivalents)

iv) Dividend cover is the basic earnings per ordinary share declared for the financial year dividend by the dividend per ordinary share declared for the same financial year.

v) Group gearing is calculated as the sum of Bank Overdrafts plus Borrowings less cash and cash equivalents divided by total equity.

vi) Group collections are the total monthly collections, settlement proceeds and recovery collections in motor finance added to the total amount retained from advances, customer redemptions and recovery collections in property bridging.

 

 

 

 

2.5 Critical accounting judgements and key sources of estimation uncertainty

In preparing these financial statements, the Company has made judgements, estimates and assumptions which affect the reported amounts within the current and next financial year. Actual results may differ from these estimates.

 

Estimates and judgements are regularly reviewed based on past experience, expectations of future events and other factors.

 

 

Critical accounting judgements

The following are the critical accounting judgements, apart from those involving estimations (which are dealt with separately below), that the Directors have made in the process of applying the Company's accounting policies and that have the most significant effect on the amounts recognised in the financial statements.

Significant increase in credit risk for classification in Stage 2

The Company's transfer criteria determine what constitutes a significant increase in credit risk, which results in a customer being moved from Stage 1 to Stage 2. As a result of the uncertainty over the performance of customers who were granted a payment holiday as part of the Government and FCA support measures and have also either requested a second payment holiday or have had a previous payment delinquency, we have assessed these customers to have a significant increase in credit risk and they are therefore included in Stage 2. However, if a customer's payment holiday finished more than 12 months ago and they are unimpaired 12 months later then an account will not be in stage 2 as the customer's post-holiday payment record now indicates low credit risk at the reporting date.

Key sources of estimation uncertainty

The directors consider that the sources of estimation uncertainty which have the most significant effect on the amounts recognised in the financial statements are those inherent in the consumer credit markets in which we operate relating to impairment as outlined in 1.4 above. In particular, the Group's impairment provision is dependent on estimation uncertainty in forward-looking on areas such as employment rates, inflation rates and used car and property prices.

The Group implemented IFRS 9 from 1 February 2018 by developing models to calculate expected credit losses in a range of economic scenarios. These models involve setting modelling assumptions, weighting of economic scenarios, the criteria of determining significant deterioration in credit quality and the application of adjustments to model outputs. We have outlined assumptions in our expected credit loss model in the

current year. Reasonable movement in these assumptions might have a material impact on the impairment provision value.

 

Macroeconomic overlay for our motor finance business

For this overlay, the Group considers four probability-weighted scenarios in relation to unemployment rate: base, upside, downside and severe scenarios as follows:

 

		Base	Upside	Downside	Severe	Weighted
			(30% increase)	(30 % decrease)	(50% increase)
Weighting		50%	5%	40%	5%
Q1 2022		3.80%	2.66%	4.94%	5.70%	4.29%
Q1 2023		4.20%	2.94%	5.46%	6.30%	4.75%
Q1 2024		4.60%	3.22%	5.98%	6.90%	5.20%
Q1 2025		5.00%	3.50%	6.50%	7.50%	5.65%

 

Inflation rates have not previously been factored into the macroeconomic overlay but at 31 January 2022 we have included them due to the extraordinary increases currently forecast for the next 12 months period and the potential impact on our customers and their repayments. The Group considers four probability-weighted scenarios in relation to inflation rate: base, upside, downside and severe scenarios as follows:

 

		Base	Upside	Downside	Severe	Weighted
			(30% increase)	(30 % decrease)	(50% increase)
Weighting		50%	5%	40%	5%
Q1 2022		5.70%	3.99%	7.41%	8.55%	6.44%
Q1 2023		5.20%	3.64%	6.76%	7.80%	5.88%
Q1 2024		2.10%	1.47%	2.73%	3.15%	2.37%
Q1 2025		1.60%	1.12%	2.08%	2.40%	1.81%

 

An increase by 0.5% in the weighted average unemployment rate would result in an increase in the impairment loss by £856,687. A decrease by 0.5% would result in a decrease in the impairment loss by £856,687. An increase by 0.5% in the weighted average inflation rate would result in an increase in the impairment loss by £401,572. A decrease by 0.5% would result in a decrease in the impairment loss by £401,572.

 

Depreciation of assets for motor finance was £427,000 (2021: £417,000), for property bridging finance was £21,000 (2021: £18,000) and for central was £81,000 (2021: £86,000). Fixed asset additions for motor finance were £337,000 (2021: £1,198,000), for property bridging finance were £16,000 (2021: £14,000) and for central were £24,000 (2021: £3,000).

The net finance credit for central costs was £2,506,000 (2021: £2,577,000), for motor finance was a cost of £4,394,000 (2021: £5,381,000) and for property bridging finance was a cost of £1,884,000 (2020: £764,000). The tax credit for central costs was £24,000 (2021: tax charge of £48,000), for motor finance was a tax charge of £8,408,000 (2021: £3,265,000) and for property bridging finance was a tax charge of £652,000 (2021: £169,000).

The significant products in motor finance are car and other vehicle loans secured under hire purchase agreements.

The significant products in property bridging finance are bridging loans secured on property.

The assets and liabilities of the Parent Company are classified as Central.

No geographical analysis is presented because all operations are situated in the United Kingdom.

 

 

 

 

 

 

The credit risk inherent in amounts receivable from customers is reviewed as per note 2.3 and under this review the credit quality of assets which are neither past due nor impaired was considered to be good with the exception of 1,688 vulnerable or Covid impacts payment deferral customers who although not in arrears at 31.1.22 were assessed from a review of internal data to have a significant increase in credit risk (2021: 6,298) . Under IFRS9 therefore these customers although not in arrears are included in stage 2 at 31.1.22 with an increased impairment provision. 

6. AMOUNTS RECEIVABLE FROM CUSTOMERS (CONTINUED)
Analysis of loan loss provision and amounts receivable from customers (capital)
	Not credit		Not credit		Credit
	Impaired		Impaired		Impaired
	Stage 1:		Stage 2:		Stage 3:
	Subject to		Subject to		Subject to		Total		Amounts
	12 months		lifetime		lifetime		Provision		Receivable
As at 31 January 2022	ECL		ECL		ECL
	£'000		£'000		£'000		£'000		£'000
Motor finance	(22,129)		(2,769)		(66,583)		(91,481)		350,517
Property bridging finance	(446)		-		(200)		(646)		64,525
Total	(22,575)		(2,769)		(66,783)		(92,127)		415,042
	Stage 1:		Stage 2:		Stage 3:
	Subject to		Subject to		Subject to		Total		Amounts
	12 months		lifetime		lifetime		Provision		Receivable
As at 31 January 2021	ECL		ECL		ECL
	£'000		£'000		£'000		£'000		£'000
Motor finance	(14,367)		(12,759)		(65,457)		(92,583)		339,349
Property bridging finance	(313)		-		(18)		(331)		34,475
Total	(14,680)		(12,759)		(65,475)		(92,914)		373,824
			Stage 1:		Stage 2:		Stage 3:
			Subject to		Subject to		Subject to		Total
			12 months		lifetime		lifetime		Provision
Analysis of Loan loss provisions			ECL		ECL		ECL
			£'000		£'000		£'000		£'000
At 1 February 2020			13,603		51		50,676		64,330
Net transfers and changes in credit risk			(5,051)		11,502		17,014		23,465
New loans originated			6,302		1,219		5,719		13,240
Total impairment charge to income  statement			1,251		12,721		22,733		36,705
Amount netted off revenue for stage 3 assets			-		-		8,891		8,891
Utilised provision on write-offs			(174)		(13)		(16,825)		(17,012)
At 31 January 2021			14,680		12,759		65,475		92,914
Net transfers and changes in credit risk			(3,144)		(7,462)		(2,775)		(13,381)
New loans originated			11,212		112		6,177		17,501
Total impairment charge to income statement			8,068		(7,350)		3,402		4,120
Amount netted off revenue for stage 3 assets			-		-		10,197		10,197
Utilised provision on write-offs			(173)		(2,640)		(12,291)		(15,104)
At 31 January 2022			22,575		2,769		66,783		92,127

7. EARNINGS PER ORDINARY SHARE

The calculation of earnings per ordinary share from continuing operations is based on profit after tax of £37,982,000 (2021: £14,646,000).

The number of shares used in the basic eps calculation is the weighted average number of shares in issue during the year of 12,142,928 (2021: 12,129,768).  There are a total of 5,500 dilutive share options in issue (2021: 17,000) and taking into account the appropriate proportion of these dilutive options the number of shares used in the diluted eps calculation is 12,145,096 (2021: 12,134,619).