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24 November 2010 EMERGING COMPANIES RESEARCH
EMERGING COMPANIES
SECTOR
Ultimate Finance*
BUY
Benefits of Ashley overlooked; substantial upside
Price 12.75p
Target Price 24p
With the Ashley acquisition completed, we are issuing revised forecasts to reflect
Reuters/BBG UFG.L / UFG LN the deal which we expect to be earnings enhancing in the current year and
Index FTSE AIM substantially so in FY12. On our revised projections, the enlarged business trades
Sector Financial Services on a FY12 P/E of 4.6x, a substantial pricing anomaly relative to Ultimate’s peer
Market Cap £6.3m group and the wider speciality financial sector. Supported by a FY12 dividend yield
Shares in Issue 49.7m of 8.6%, there is clear scope for a substantial re-rating and we reinstate our Buy
NAV 13.3p (est) recommendation with 24p price target (from 19.5p).
Gearing 475% (est)
Our take on Ashley is that it is exactly the sort of deal AIM was designed to
Performance vs AIM
facilitate. Whilst Ashley’s profit track record is robust, funding constraints meant that more
1 month: -16.7%
recent growth was impeded as the business came up against headroom. The combination
3 months: -44.4%
with UFG – with commensurately higher facilities – should enable this business to grow
12 months: -43.4%
once more. Combined with the scope for synergies (which we see totalling £200k in
High/Low 17p / 12.75p
FY12), we expect the deal to be earnings enhancing in the current year and substantially
so in the first full year of ownership.
Last Results Sept-10 (F)
Next Event Mar-11 (I)
The current macro backdrop is supportive of UFG’s business model. With bank
overdraft funding still constrained and often carrying large fees, the flexibility of factoring
and invoice discounting is increasingly appealing to SMEs. Clients also prefer dealing with
18
an independent company rather than a high street bank due to their more hands-on
17
personal approach and close relationships. Data from the ABFA suggests the invoice
16
finance market has grown by 163% since 2000 and was worth over £200bn as at June
15
2010.
14
13 The fall in share price post completion of the deal appears to have been driven
12 entirely by technical factors. This follows the issue of 22.9m new shares at 12p, which
Nov-09
May-10
Dec-09
Jan-10
Feb-10
Mar-10
Apr-10
Jun-10
Jul-10
Aug-10
Sep-10
Oct-10
represented dilution of 115%. With today’s AGM statement confirming that current trading
is robust, there would appear scope for a substantial re-rating given the discount to both
Source: Fidessa the wider Financial Services sector average P/E of 25.2x and the peer group P/E of 9.5x.
We therefore reinstate our Buy recommendation and increase our price target from 19.5p
*WH Ireland acts as Joint Broker. to 24p to reflect the substantial enhancement to earnings.
WH Ireland Group Plc, its directors,
connected parties and discretionary clients
have a 19.82% shareholding in Ultimate
Finance Group. Richard Lee is a non- Estimates (Jun) 2009A 2010A 2011E 2012E
executive director of Ultimate Finance and a
non-executive director of WH Ireland Group Revenue (£000s) 4,757 6,441 9,325 11,500
Plc. PTP (£000s) 406 523 1,155 1,936
This document has not been prepared in EPS (p) 1.60 1.72 2.09 2.80
accordance with legal requirements designed to
promote the independence of investment P/E (x) 8.0 7.4 6.1 4.6
research. DPS (p) 0.25 0.60 0.85 1.10
Yield (%) 2.0 4.7 6.7 8.6
Analyst Eric Burns Net Cash (£m) -15.8 -22.4 -31.6 -33.5
+44 (0)113 394 6608
eric.burns@wh-ireland.co.uk Net Assets (£m) 2.9 3.1 6.6 9.5
Sales Richard Smith
+44 (0)121 235 6304
richard.smith@wh-ireland.co.uk
Seb Wykeham
+44 (0)20 7220 0473
WH Ireland Limited, 11 St James’s Square, Manchester, M2 6WH
sebastian.wykeham@wh-ireland.co.uk WH Ireland is authorised and regulated by The Financial Services Authority and is a member of The London Stock Exchange.
Important disclosures and certifications regarding companies that are the subject of this report can be found within the disclosures page
at the end of this document.
ULTIMATE FINANCE*
PROFIT & LOSS
Y/E Jun (£000s) 2009A 2010A 2011E 2012E
Net Group Revenue 4,757 6,441 9,325 11,500
Growth (%) 14.7 35.4 44.8 23.3
EBIT 404 523 1,216 2,011
EBIT Margin (%) 8.5 8.1 13.0 17.5
Interest 2.0 0.0 -60.2 -75.0
Pre-Tax Profit Clean 406 523 1,155 1,936
Exceptionals 0.0 0.0 0.0 0.0
Pre-Tax Profit Headline 406 523 1,155 1,936
Tax Rate (%) 21.2 34.2 28.0 28.0
Shares in Issue (Avg) 20.0 20.0 39.7 49.7
EPS (p) Clean 1.60 1.72 2.09 2.80
Growth (%) 5.3 7.5 21.8 33.8
Dividend (p) 0.25 0.60 0.85 1.10
Growth (%) - 140.0 41.7 29.4
CASHFLOW & BALANCE SHEET
Y/E Dec (£000s) 2009A 2010A 2011E 2012E
Group EBIT 404 523 1,216 2,011
Depreciation 70 49 75 75
Working Capital -5,075 -6,873 -10,051 -3,300
Other 0 0 0 0
Operating Cashflow -4,601 -6,301 -8,760 -1,214
Interest -2 0 -60 -75
Tax -23 37 0 0
Gross Free Cashflow -4,626 -6,264 -8,821 -1,289
Capex -38 -199 -100 -100
Acquisitions/Disposals 0 0.0 -3,700 0
Dividend 0 -110 -338 -547
Other 0 0 0 0
In/outflow b/f -4,664 -6,573 -12,958 -1,937
Share Issue (net) 0 0 1,830 0
Other Financing 0 0 2,000 0
Net Cashflow -4,664 -6,573 -9,128 -1,937
Net Cash -15,771 -22,344 -31,472 -33,409
Net Assets 2,907 3,071 6,625 9,500
WH Ireland 2
ULTIMATE FINANCE*
Investment Case
Earnings enhancing nature of the Ashley The acquisition of Ashley is expected to be significantly earnings enhancing in its first full
acquisition leads to an upgrade in our year of ownership with our valuation exercise - against an admittedly depleted peer group
target price to 24p – suggesting fair value for the enlarged business of 24p a share, a substantial uplift on our
previous target of 19.5p. Our new target represents a FY12 P/E ratio of 8.6x and is still a
material discount to the wider financial services sector average of 25.2x.
Forecast dividend yield of 8.6% in FY12 Ultimate’s stated policy of a progressive dividend going forward leads us to forecast a
dividend of 0.85p for the current year and 1.1p for next. This is based on the assumption
of a 40% payout ratio, slightly higher than the 33% delivered in FY10. At this level, the
dividend yield is a highly attractive 6.7%, rising to 8.6% in FY12.
The macro drivers of the invoice finance market are strong. With bank overdraft funding
Macro backdrop should be favourable still constrained and often carrying large fees, the flexibility of factoring and invoice
discounting is increasingly appealing to SMEs. Clients also prefer dealing with an
independent company rather than a high street bank due to their more hands-on personal
approach and close relationships. Data from the ABFA suggests the invoice finance
market has grown by 163% since 2000 and was worth over £200bn at June 2010.
With the speciality finance sector witnessing an unprecedented shake-out over the past
two years, causing some high profile casualties (including Cattles and Davenham), there
is clearly a vast opportunity for those lenders that remain in the market. This is already
evident at Ultimate where growth has outstripped that of the wider invoice finance market
over the past few years. We would expect this to be even more pronounced as economic
recovery gains momentum, particularly at Ashley which services the smaller and start-up
end of the SME market.
Ultimate may drive consolidation in the Consolidation of smaller players in the speciality finance sector is inevitable and it is those
speciality finance space with the strongest relationships with funders that are likely to prosper. The Ashley
acquisition is a good case in point with Lloyds extending its facilities post completion of the
deal, a significant endorsement of Ultimate’s business model. Through Ashley, Ultimate
has very much staked its claim to be a driver of industry consolidation in our view.
We expect the endgame for UFG to be a takeover by a larger finance house or bank. At
We believe a take-out by a larger player
its current book size, the company is probably below the radar but at the £50m-£100m
could be the endgame
size it could start to look like an attractive opportunity for a player looking to bolster its
position or buy in market share. The timing of such a move, however, is difficult to predict
and is likely to be dictated by the banking cycle.
On the basis of our average peer group P/E valuation, we see fair value for UFG of
between 22p and 26p per share. Taking the mid-point of this range gives our target
price of 24p.
Fig 01: Peer group valuation
Ticker Price Mkt cap Yr-End PER Yield
(p) (£m) Hist Yr1 Yr2 Hist Yr1 Yr2
Albemarle & Bond Holdings ABM 290.8 161.4 Dec 11.2x 11.4x 10.4x 4.0% 4.0% 4.2%
Arbuthnot Banking Group PLC ARBB 387.5 56.6 Mar 16.6x 15.4x 11.7x 3.1% 5.9% 6.1%
H&T Group PLC HAT 320.0 113.9 Mar 8.5x 7.0x 11.2x 2.8% 2.8% 2.9%
Private & Commercial Finance Group PLC PCF 6.0 3.2 Mar 6.7x 8.6x 4.7x 0.0% 0.0% 0.0%
Simple Average 10.7x 10.6x 9.5x 2.5% 3.2% 3.3%
Source: WH Ireland research
WH Ireland 3
ULTIMATE FINANCE*
Rationale for Ashley Acquisition
Ashley brings a highly profitable niche to the UFG business. Whilst both companies
operate in the same broader market of invoice finance, Ashley currently only provides
recourse factoring and its average client invoice size is far smaller at £16k (vs over £100k
for UFG). Margins at the smaller end of the market tend to be far wider than at the larger
Ashley’s margins are substantially wider end (which Ultimate had been trending towards) hence Ashley’s operating margin is
than those at the existing UFG currently running at around 22% vs 8% for the existing Ultimate business. Thus, the
enlarged group’s operating margin should be increased substantially (our estimates
assume 16.8% in FY12).
Whilst there are differences in the companies’ product offering and modi operandi, their
business models are fundamentally the same.
As we see it, the principal benefits of the Ashley acquisition are:-
• Access to greater funding. Post completion, Ultimate’s strong relationship with
LloydsTSB Commercial Finance means that the enlarged group’s facilities have
been extended to £34m thus providing greater headroom for Ashley which had
seen its growth restricted by its existing £3.5m facility. This is likely to have an
immediate positive impact on Ashley’s levels of business and hence profitability.
• Scope for cross-selling. Ashley currently only provides recourse factoring and
its customer base (and introducers) could be offered other UFG services such as
debtor protection or trade and asset finance. We have not modelled in any
contribution from cross-selling into our forecasts.
• Diversification of customer base. With Ashley’s customers being significantly
smaller in size than the existing Ultimate business, this helps to reduce the
company’s over-reliance on one part of the SME market. Historically, when
Ashley’s clients have outgrown its target size, they have been referred to
alternative lenders. Hence it should be possible to retain the majority of these
clients within the enlarged business. Conversely, Ultimate receives a number of
enquiries from businesses that are too small for it but that would be suitable for
Ashley.
• Cost synergies which are estimated by the company to be as much as £400k
per annum. This will include consolidation of Ashley’s head office (lease expired)
into Ultimate’s existing office in central Manchester, around 8 miles from Ashley’s
existing office in Cheadle. In the interests of prudence, and as discussed in more
detail later, we have only credited the business with nominal cost synergies in the
current financial year and half the company’s guidance for FY12 (=£200k) in our
forecasts.
• There is a solid geographical fit between Ultimate and Ashley. The enlarged
group’s geographical presence in the North West will be significantly
strengthened. In addition, utilising Ultimate’s current locations will help to bolster
Ashley’s presence in other geographical areas such as London, the Midlands and
the South West.
WH Ireland 4
ULTIMATE FINANCE*
Acquisition Terms
The principal terms of the acquisition of Ashley were:-
• Initial consideration of £4,750,000 to be satisfied on completion as to £3,700,000
in cash and 6.67m ordinary shares in the enlarged group at the 15.75p
suspension price (the latter locked in for a period of 24 months);
• Year 1 deferred consideration at the rate of £6 for every £1 in excess of £850,000
of profit before tax of Ashley in the year from 1 November 2010 to 31 October
2011 (subject to a maximum of £1,350,000);
• Year 2 deferred consideration at the rate of £6 for every £1 in excess of £1.1m of
profit before tax of Ashley in the year from 1 November 2011 to 31 October 2012
(subject to a maximum of £1,350,000)
Based on the initial consideration alone, the price paid represented a purchase price of
8.75x historic earnings. Assuming both Year 1 and Year 2 earn-outs are achieved in full,
the price paid represents a maximum Year 2 multiple of 7.2x. Both these multiples are
before any cost synergies which, as we discuss, could be substantial. For comparison,
existing Ultimate traded on a P/E ratio of 9.1x as at the suspension price of 15.75p.
The deferred consideration is payable in cash other than up to £100,000 of the first
tranche and up to £600,000 of the second tranche which can, at the discretion of Ultimate,
be payable either in cash or deferred consideration shares. The deferred shares – which
could also be the subject of a 24 month lock-in – would be issued at a price representing
the higher of the average of the mid closing price over the period of five trading days
before the allotment date and 12p, being the placing price.
In order to fund the cash element of the acquisition, the company raised £2.75m through a
share placing of 22.9m shares at 12p. Thus, taken together with the 6.67m vendor shares,
there are now 49.7m shares in issue, representing dilution of 149%. The maximum fully
diluted number of shares in issue is 56.3m which assumes the vendor takes the maximum
number of shares as deferred consideration and includes all outstanding share options
etc.
In addition, LloydsTSB, provider of Ultimate’s back-to-back facility, granted Ultimate an
acquisition finance facility of up to £2 million, in our view, a clear endorsement of the deal.
The facility, which is repayable over 5 years, attracts interest at the rate of 4% above
LIBOR as well as an £80k set-up fee.
WH Ireland 5
ULTIMATE FINANCE*
The Invoice Finance Market
According to industry body the Asset Based Finance Association (ABFA), the UK market
has grown significantly since 2000 as factoring and invoice finance become increasingly
mainstream sources of finance. Between 2000 and June 2010, total client sales financed
throughout the industry grew by circa 163% to reach over £200bn whilst the total number
of clients using factoring facilities grew by 62% to over 41,000.
The key attractions to SMEs of invoice finance over bank overdrafts and other forms of
short-term finance are:-
• It can better facilitate growth as funding normally increases in line with trading ;
• Often only the book debts are required as security, releasing other assets for
additional borrowing;
• Contracts are normally open-ended but with a minimum contract term plus a
termination notice period; and
• Funding can often be provided within 24 hours of receiving the sales invoices
Whilst subsidiaries of the high street banks have the lion’s share of the invoice finance
market, there are also a number of small independent players such as Ultimate which
collectively account for, perhaps, 10% or so of the market. Indeed, many of the smaller
operators have been spawned by larger factoring businesses where one or two principals
have exited to establish their own offering to clients. Ultimate was one such company with
two of its current principals, Richard Pepler and Jeremy Coombs, establishing the
business after working together at Bibby Factors.
During the past year of economic uncertainty, the market as a whole has seen a small
contraction, and total advances to clients across the industry fell slightly in 2009. It should
be noted, however, that UFG continued to grow, with total client turnover financed growing
considerably half-on-half throughout this period.
Fig 02: UK factoring and invoice discounting market (1995-present)
250
200
Value (£bn)
150
100
50
0
1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009
Source: Asset Based Finance Association
Bad debts from invoice finance tend to be lower than for other forms of financing, largely
due to the recourse available should invoices not perform. In the event that the invoice
assigned is not paid within 90 days, Ultimate is able to re-factor the invoice to the client
and, in many cases, there will be further security taken as personal guarantees from the
principal(s) of the client. In fact, UFG earns income from recoveries and associated fees.
As at their respective latest year-ends, bad debt provisions for the enlarged group
amounted to £472k, representing approximately 1.5% of the receivables book (split as
0.9% for existing UFG and 5.1% for Ashley). Ashley has a very good record in credit
control, with one of the market leading debt turns of 53 days as at 31 March 2010.
WH Ireland 6
ULTIMATE FINANCE*
The Enlarged Group
Following completion of the deal, the enlarged business now serves more than 550 clients
across a wide range of sectors from printers to road haulage companies, recruitment
agencies to taxi firms, recycling companies to IT organisations. Business is referred to it
through a network of more than 500 introducers including specialist finance brokers and
accountants. In addition, Ashley generates a significant number of leads through its
website and direct marketing efforts.
Across all the channels, the business receives around 120 enquiries per month, of which
around 15% are converted. The typical checks that Ashley undertakes in respect of a
potential new client include reviewing land registry records, voter registration, credit-safe
and Equifax reports, disqualification searches, winding up petitions and bankruptcy
records but other sources can be used depending on the circumstances of the potential
client. The group operates a credit committee through which all new lending has to be
approved. In addition, any amounts greater than £75,000 require the approval of the Chief
Executive or Managing Director.
The total loan book stands at approximately £30m with Ashley having net receivables of
£4.1m as at March and the existing Ultimate business having £25.8m outstanding as at
June. The business is funded by a £34m back-to-back facility with LloydsTSB Commercial
Finance (split as £30m existing UFG and £4m Ashley) with a further line of circa £500k for
the trade finance operation and an additional back-to-back facility with Siemens Financial
Services and Singers Corporate Asset Finance for the fledgling asset finance business.
The enlarged Ultimate business is funded primarily by a £34m back-to-back facility
provided by LloydsTSB Commercial Finance which runs until July 2013. This facility has
been gradually increased over the past three years (it was £14m in 2005), clearly
demonstrating a large degree of confidence in the Ultimate model and we see no reason
for this not to continue. Historically, Ashley has been funded in the same way by Lloyds
although being part of the larger entity means that its £3.5m facility has been rolled into
the group-wide £34m line.
The main services provided by the enlarged group are:-
Factoring
The enlarged business advances clients a pre-determined percentage of approved
invoices (normally up to 85 per cent) together with a debt collection/sales ledger
management service. The key point here is that approved invoices usually represent
around 75% of the client’s total invoices hence the percentage of total invoices advanced
is typically slightly above 50%, providing a good degree of protection from non-performing
invoices. If the invoice assigned does not perform, Ultimate has recourse against its
customer and, in some cases, will have further recourse against the principals within the
customer’s business. For its services, a typical factoring fee of between 1% and 3% of the
invoice value is charged. Service fee income is the single largest contributor to revenue.
Invoice Discounting
Again, Ultimate will normally advance up to 85% of approved invoices but the client is
responsible for collecting the debts. This has the advantage of confidentiality, with the
clients’ end customers being unaware that their invoice has been assigned to Ultimate.
Payments from the client’s customers are made to a trust account provided by Lloyds
Bank in the name of the client but held and managed exclusively by Ultimate from which it
repays to the client the balance of the invoice less any fee due. Service fees are typically
between 1% and 3%.
WH Ireland 7
ULTIMATE FINANCE*
Ultimate Choice and CASH
Because the structures of factoring and invoice discounting are slightly different, Ultimate
offers a product called “Choice”, which allows clients to use a mix-and-match approach to
their sales ledger credit management, some carried out by Ultimate and some by the
client. In addition, Ultimate provides funding, sales ledger administration and payroll
management services (via a third party) for temporary recruitment and labour hire
agencies under the “CASH” brand.
Debtor Protection
The Existing Group provides bad debt protection against the risk of debtors ceasing to
trade or being in protracted default. This service is optional for its invoice and trade
finance services. Debtor protection is sub-underwritten through an agreement with Chartis
Insurance UK Limited.
Ultimate Trade Finance
Ultimate Trade Finance Limited provides trade finance to assist with purchase orders of
finished goods, whether import, export or domestic. All goods are purchased against
confirmed orders. This service normally includes debtor protection. Ultimate Trade
Finance Limited provides additional specialist services such as shipping and delivery
services and goods inspections.
Ultimate Asset Finance
Ultimate Asset Finance was established earlier this year to provide small ticket hire
purchase and leasing facilities to SMEs, many of which are existing customers for
factoring and/or invoice discounting.
The business earns revenue from three principal sources:-
Factoring/ Discount Service Fee – this is charged as a percentage of the invoice value
factored or discounted. It is typically in the 1% to 3% range with Ashley’s clients, due to
their small size, being at the higher end of this range. This is Ultimate’s main source of
revenue, accounting for approximately 50%.
Discount Charge/ Interest Income – Ultimate charges interest on the total amount
outstanding (or, in the case of invoice discounting, there is an implied interest rate built
into the arrangement) which is typically a margin over LIBOR. This margin has been
historically circa 2% for the existing Ultimate business and closer to 4% at Ashley.
Ultimate earns a margin on this over and above the amount it gets charged on the Lloyds
facility (currently LIBOR + 2%). Our expectation is that this will account for approximately
25% of revenue going forward.
Special Fees and Other Income – The final slice of revenue is derived from a
combination of special and other charges, these being payable usually when a customer
wishes to vary the terms of an agreement. Examples of this would include a temporary
increase in facility or re-factoring fees. In addition, where an invoice goes into default,
Ultimate’s contract allows it to make certain legal and other charges to collect the amount
outstanding.
WH Ireland 8
ULTIMATE FINANCE*
Financials
Existing Ultimate
UFG operates with a June year-end and FY10 results were released in September.
Stripping out exceptional acquisition costs, these results were circa 4% ahead of our PBT
expectation and would have in fact been further ahead were it not for start-up losses of
£30k from the fledgling trade finance business. There would likely have been some hefty
Revenue Segm ental (FY10A) upgrades to the current year numbers on the back of the strength of these results alone.
Other Fees,
26.7% The company delivered a WHI adjusted PBT of £523k and EPS of 1.72p on revenue of
£6.4m. Service fee income (the fee Ultimate charges for providing the finance facility) was
once again the largest contributor to revenue at £3.2m with interest income of £1.5m and
other fees totalling £1.7m.
Interest Service Fee
Income, Income,
50.6%
Margins contracted slightly, a function of the slightly larger average client size. The
22.7%
company declared a dividend of 0.6p (approximately one third of retained earnings), this
representing a 140% increase on the previous year when a maiden dividend was
declared. Our assumption going forward is for a dividend payout ratio of 40%.
Client numbers increased by 17% from 254 to 298 whilst client turnover financed
increased by 47% to £312m. Figure 03 below shows the half-on-half progression of this
latter metric which, with the exception of H208, has shown consistent growth. This is
significant as Ultimate charges a service fee (typically 1%) of this amount and the
enhanced run-rate bodes well for the current year outcome where we expect service fee
income of £3.6m. At the period end, the company had a receivables book of £26.3m
(funded by £23m of the Lloyds back-to-back facility).
A provision for impairment of £143k was taken during the year (representing just 0.5% of
total receivables) taking total provisions to £247k at the balance sheet date (0.9% of
receivables).
Fig 03: Existing Ultimate Finance – half yearly client sales financed
180.0
160.0
140.0
120.0
100.0
80.0
60.0
40.0
20.0
0.0
H1 06 H2 06 H1 07 H2 07 H1 08 H2 08 H1 09 H2 09 H1 10 H2 10
Client sales financed (£m)
Source: WH Ireland research / Company data
Ashley Commercial Finance
Ashley operates with a March year-end hence the latest published results relate to the
year ended 31 March 2010. A feature of these results was that the loan book flatlined as it
WH Ireland 9
ULTIMATE FINANCE*
was up against its facility headroom (£3m at the time, subsequently increased to £3.5m)
meaning that receivables (net of impairment) decreased from £4.6m to £4.2m.
Revenue was ahead by 5% at £3.0m split as Service Fees of £1.5m, Discount Income
£367k and Other Fees of £1.1m. Whilst the service fee element of Ashley’s revenue is a
very similar proportion of that of existing Ultimate, the discount (finance) income is lower,
largely as a result of Ashley’s faster debt turn which is 53 days.
Ashley delivered an operating profit of £691k, a 14% decline on the FY09 comparative,
but representing an attractive operating margin of 22.7%. The profit before tax figure was
£726k (2009: £806k). Taxation amounted to £183k representing an effective tax charge of
25.2%.
With Ashley’s headroom now increased and absorbed into the enlarged Ultimate facility,
we have confidence that the company’s historic growth trend will be restored.
Enlarged group forecasts
Given the enhanced facilities now available, we expect the enlarged group to make
significant progress in FY11 and FY12 with Ashley, in particular, no longer constrained by
headroom. The £34m facility can be applied across both businesses at the company’s
discretion hence there would appear to be significant scope for substantial profit
progression.
We expect around £31m of the enlarged facility to have been utilised by the end of FY11,
split roughly as £27m existing Ultimate and £4m Ashley, this supporting a receivables
book across both businesses of more than £35m. With the results including Ashley for an
8 month period, we look for revenue of £9.3m; WHI PBT of £1.15m and WHI EPS of
2.09p, all these figures adjusted for exceptionals and amortisation of acquired goodwill
relating to Ashley. We model no meaningful contribution from the fledgling asset finance
business. Assuming a 40% payout ratio suggests a dividend of 0.85p per share, a 42%
increase on FY10.
For FY12, the full benefits of Ashley should be seen with a 12-month contribution and
some of the cost synergies coming through (we have conservatively assumed £200k
against guidance of £400k). We expect the enlarged group to have reached current
headroom of £34m at the end of this period (although the likelihood we believe is that the
facility will have been extended). This should support revenue of £11.5m, WHI PBT of
£1.94m and WHI EPS of 2.80p, again all figures quoted adjusted for goodwill amortisation
relating to Ashley. We treat any contribution from asset finance as upside to these
numbers. On the same basis as FY11, we expect a dividend payment of 1.1p per share.
WH Ireland 10
ULTIMATE FINANCE*
Valuation
We have carried out a valuation of Ultimate relative to its peer group although the severe
contraction in the speciality financials market over the past two years has rather depleted
this list. In addition, of those that remain, some of the smaller players have no current
published estimates in the market.
General Capital and Cattles have effectively exited the stockmarket whilst Davenham
(AIM: DAV) has ceased writing new business and was close to de-listing in summer. What
remains is an eclectic bunch of finance providers operating different business models
ranging from doorstep lender Provident Financial (LSE: PFG) to leasing businesses such
as Private & Commercial Finance (AIM: PCF).
Whilst the AIM speciality financial sector currently trades on a forward P/E multiple of
25.2x, this rating is skewed towards some of the larger fund management businesses
(which tend to command higher valuations than finance providers) and we therefore
present below the sub-sector we believe to be relevant to Ultimate. As well as Private &
Commercial Finance, arguably UFG’s closest quoted peer, we have also included
Arbuthnot Banking (owner of Secure Trust) and high street pawnbrokers H&T Group (AIM:
HAT) and Albermarle & Bond (AIM: ABM).
Fig 04: Peer group valuation
Ticker Price Mkt cap Yr-End PER Yield
(p) (£m) Hist Yr1 Yr2 Hist Yr1 Yr2
Albemarle & Bond Holdings ABM 290.8 161.4 Dec 11.2x 11.4x 10.4x 4.0% 4.0% 4.2%
Arbuthnot Banking Group PLC ARBB 387.5 56.6 Mar 16.6x 15.4x 11.7x 3.1% 5.9% 6.1%
H&T Group PLC HAT 320.0 113.9 Mar 8.5x 7.0x 11.2x 2.8% 2.8% 2.9%
Private & Commercial Finance Group PLC PCF 6.0 3.2 Mar 6.7x 8.6x 4.7x 0.0% 0.0% 0.0%
Simple Average 10.7x 10.6x 9.5x 2.5% 3.2% 3.3%
Source: WH Ireland research
On the basis of our valuation exercise using simple averages for the peer group based on
Year 1 and Year 2 forecasts, this suggests fair value for UFG of between 22p and 26p per
share. Taking the mid-point of this range gives our target price of 24p.
Given UFG’s commitment to a progressive dividend yield based on what we have
estimated to be a targeted 40% payout ratio, the valuation on yield grounds relative to the
peer group also stacks up incredibly well with an estimated Year 2 dividend yield of 8.6%,
more than twice that of the peer group.
WH Ireland 11
ULTIMATE FINANCE*
Directors
Clive Garston – Chairman, Age 65
Clive is a solicitor and consultant with Davies Arnold Cooper LLP, an international law firm
with offices in London, Manchester, Madrid and Mexico City. He is a non-executive
director of Pall Mall Capital Limited and has been a non-executive director of many other
private and public companies. He is a Fellow of the Securities & Investment Institute, a
fellow of the Institute of Directors and a member of the corporate governance committee
of the Quoted Companies Alliance.
Richard Pepler FICM – Chief Executive Officer, Age 50
Richard has over 32 years’ experience in commercial banking and asset/trade finance. He
was appointed CEO of Ultimate in March 2008 (although he was Acting CEO from
October 2007), having been Group Managing Director since founding the business in
2002. He was previously National Sales Manager of Bibby Factors Limited, co-founder
and Sales Director of Bibby Factors (Bristol) Limited and Head of Marketing for Bibby
Group of Factors Limited.
Shane Horsell CIMA, CIPFA, MBA – Group Finance Director, Age 44
Shane has over 22 years’ experience in various financial roles, latterly as Finance Director
of Blick UK Limited, a main subsidiary of Blick Plc and Group Finance Director of Advent
Publishing Systems Limited. Shane joined the Company in 2006.
Jeremy Coombes ABFA Dip. – Group Managing Director, Age 46
Jeremy has over 23 years’ experience in operational and underwriting roles. He was
appointed Group Managing Director in January 2009, having been a founding member of
the Company in 2002. Jeremy was previously International New Business Co-ordinator of
Griffin Factors Limited (now known as HSBC Invoice Finance Limited) and a Senior Client
Manager at NMB-Heller Limited (now known as GE Capital Commercial Finance Limited).
He was also co-founder and Operations Director of Bibby Factors (Bristol) Limited.
Richard Lee – Non-executive Director, Age 65
Richard is a Corporate Strategy Consultant and a director of WH Ireland Group plc. He
has experience as a director of a number of public and private companies in a variety of
industries. He is also a director of Wilmslow Finance Holdings Limited.
Jonathan Cranston –Executive Director, Age 46
Jonathan has 25 years’ experience in the financial services industry, including his initial
vocation as a stockbroker. He joined Ashley as Managing Director shortly after its
inception and has been responsible for credit decisions and Ashley’s relationships with its
lending banks. Jonathan also runs a commercial mortgage business which is completely
separate from the Enlarged Group’s client base. It is proposed that he will join the board
upon Completion. It is expected that he will remain with the Enlarged Group for at least
the duration of the Earn-Out Period.
WH Ireland 12
ULTIMATE FINANCE*
Analysis of the environment
Porter’s five competitive forces model
Buyers Suppliers
Bargaining power of buyers Total Bargaining power of suppliers
Rating 4 18 Rating 4
Customers’ main alternative to invoice Whilst bank and other mainstream funders
finance is a bank overdraft which is likely are not obliged to provide finance to
to prove more costly and less flexible. companies such as UFG, it is generally
Industry Competitors
Rivalry among existing firms regarded as a low risk use of capital. In
addition, political considerations are likely to
help keep this source of funding in situ.
Rating 3
Most of the mainstream banks have invoice
Substitutes Potential entrants
finance operations in addition to a number
Threat of substitute products Threat of new entrants
of smaller independent factoring
companies. Nonetheless, the main
Rating 4 Rating 3
competition is still from bank overdrafts.
Invoice finance can demonstrate strong Key individuals within other factors have
growth over the past 10 years and that historically set up small businesses
shows no sign of slowing. Other than bank 5 Low although they lack the scale and access to
overdraft, there are few alternatives for 4 Low/Medium funding that UFG provides. Ashley is a
releasing working capital. 3 Medium good example of this.
2 High/Medium
1 High
SWOT analysis
Strengths Weaknesses
Excellent relationship with primary funder, evidenced by increases in facility. Dependent on one funder at the moment.
Both UFG and Ashley have demonstrated a high degree of resilience in past
few years at a time when financial backdrop has been exceptionally tight.
Good security means bad debts tend to be low.
Threats Opportunities
Integration risk associated with Ashley. Further consolidation likely in invoice finance market.
Whilst trading through the downturn has provide robust, a severe and Fledgling asset finance business set to be rolled out.
prolonged second leg down could impact negatively on profits. Demand for invoice finance likely to continue to grow.
Cost of sales line linked to Bank of England base rate hence likely to rise in
due course.
WH Ireland 13
ULTIMATE FINANCE*
THIS PAGE IS INTENTIONALLY BLANK
WH Ireland 14
ULTIMATE FINANCE*
Disclosures
Share Price Target
WH Ireland Recommendation Definitions The share price target is the level the stock should currently trade at if the market were to accept the analyst’s view
of the stock and if the necessary catalysts were in place to effect this change in perception within the performance
Buy horizon.
Expected to outperform the FTSE All Share by
15% or more over the next 12 months. Stock Rating Distribution
As at the quarter ending 30 September 2010 the distribution of all our published recommendations is as follows:
Outperform
Expected to outperform the FTSE All Share by
5/15% over the next 12 months. Recommendation Total Stocks Percentage % Corporate
Buy 43 47% 13
Market Perform
Expected to perform in line with the FTSE All Speculative Buy 6 7% 6
Share over the next 12 months. 14 15% 1
Outperform
Underperform 22 24% 4
Market Perform
Expected to underperform the FTSE All Share
by 5/15% or more over the next 12 months. Underperform 5 5% 0
Sell 2 2% 0
Sell
Expected to underperform the FTSE All Share Total 92 100% 24
by 15% or more over the next 12 months.
Speculative Buy This table demonstrates the distribution of WH Ireland recommendations. The first column illustrates the distribution
The stock has considerable level of upside but in absolute terms with the second showing the percentages.
there is a higher than average degree of risk.
Conflicts of Interest Policy
This research is classified as being “non-independent” as defined by the FSA’s Conduct of Business Rule 12.3.
Please refer to www.wh-ireland.co.uk for a summary of our conflict of interest policy.
Disclaimer Analyst Certification
This research recommendation is intended only for
The research analyst or analysts attest that the views expressed in this research report accurately reflect his or her
distribution to Professional Clients and Eligible
Counterparties as defined under the rules of the personal views about the subject security and issuer. Furthermore, no part of his or her compensation was, is, or will
Financial Services Authority and is not directed at be directly or indirectly related to the specific recommendation or views expressed in this research report.
Retail Clients. This note contains investment advice
of both a general and specific nature. It has been WH Ireland has acted as manager in the underwriting or placement of securities of this company within the last 12
prepared with all reasonable care and is not knowingly months.
misleading in whole or in part. The information herein
is obtained from sources which we consider to be Within the past 12 months, WH Ireland has received compensation for investment banking services from this
reliable but its accuracy and completeness cannot be company.
guaranteed. The opinions and conclusions given
herein are those of WH Ireland Ltd. and are subject to WH Ireland acts as joint broker to this company.
change without notice. Clients are advised that WH
Ireland Ltd. and/or its directors and employees may
have already acted upon the recommendations Companies Mentioned
contained herein or made use of all information on
which they are based. WH Ireland is or may be Company Name Recommendation Price Price Date/Time
providing, or has or may have provided within the
previous 12 months, significant advice or investment
Albemarle & Bond Holdings N/R 290.75p 23-Nov-10 @ 11:10
services in relation to some of the investments Arbuthnot Banking Group PLC N/R 387.5p 23-Nov-10 @ 11:10
concerned or related investments. Recommendations
may or may not be suitable for individual clients and H&T Group PLC N/R 320.0p 23-Nov-10 @ 11:10
some securities carry a greater risk than others. Private & Commercial Finance Group PLC Speculative Buy 6.0p 23-Nov-10 @ 11:10
Clients are advised to contact their investment advisor
as to the suitability of each recommendation for their Provident Financial Group Market Perform 777.75p 23-Nov-10 @ 11:10
own circumstances before taking any action. No
responsibility is taken for any losses, including, without
Share Price Date/Time
limitation, any consequential loss, which may be
incurred by clients acting upon such Company Name Recommendation Price Price Date/Time
recommendations. The value of securities and the
income from them may fluctuate. It should be Ultimate Finance Group Buy 12.75p 23-Nov-10 @ 11:10
remembered that past performance is not necessarily
a guide to future performance. For our mutual
protection, telephone calls may be recorded and such Summary of Company Notes
recordings may be used in the event of a dispute. Headline Date
Please refer to www.wh-ireland.co.uk for a summary
of our conflicts of interest policy and procedures. Benefits of Ashley overlooked, substantial upside 24-Nov-10
Summary of Security Recommendations
Recommendation From To Analyst*
Buy 24-Nov-10 - CA
Recommendation Suspended 22-Sep-10 24-Nov-10 CA
Buy 17-Mar-10 22-Sep-10 CA
Speculative Buy 10-Mar-09 17-Mar-10 CA
*Current Analyst (CA), Previous Analyst (PA)
WH Ireland 15
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property name.
Ultimate Finance
Ultimate Finance is a speciality finance provider, focusing on invoice finance but also incorporating a feldgling asset finance business. The company completed the transformational
acquisition of Ashley Commercial Finance in October 2010.
Valuation 2009A 2010A 2011E 2012E Major Shareholders %
P/E (x) 8.0 7.4 6.1 4.6 WH Ireland Group 10.4
EV/EBITA (x) 93.8 72.5 31.2 18.9 Credit Agricole Cheuvreux Intl 8.9
EV/Sales (x) 8.0 5.9 4.1 3.3 Oriel Trust 4.7
Dividend Yield (%) 2.0 4.7 6.7 8.6 I Robins 4.1
Dividend cover (x) 6.4 2.9 2.5 2.5 JS Cranston 4.1
Dividend cash cover (x) n/a n/a n/a n/a R Pepler (CEO) 3.8
Cash Yield (%) n/a n/a n/a n/a JH Coombes (MD) 3.3
P/CFPS (x) n/a n/a n/a n/a
P/NAV (x) 0.9 0.8 1.0 0.7 Revenue by territory (FY10A)
PEG (x) 1.5 1.0 0.3 0.1
UK
P/E at target price (x) 15.0 14.0 11.5 8.6 100%
EV/EBITA at target price (x) 101.7 78.6 33.8 20.4
Returns Profile 2009A 2010A 2011E 2012E
ROCE (%) 2.5 2.4 3.8 5.0
WACC (%) 10.0 10.0 10.0 10.0
Spread (%) -7.5 -7.6 -6.2 -5.0
CROCE (%) 2.7 1.7 3.7 4.9
ROE (%) 11.7 11.5 17.2 17.3 Revenue Segmental (FY10A)
Other Fees,
Profit & Loss (£000s) 2009A 2010A 2011E 2012E 26.7%
Revenue 4,757 6,441 9,325 11,500
EBITDA 474 572 1,291 2,086
Operating profit 404 523 1,216 2,011
Net interest 2 0 -60 -75
PTP adjusted 406 523 1,155 1,936 Interest Service Fee
Taxation -86 -179 -324 -542 Income, Income,
22.7% 50.6%
PAT adjusted 320 344 832 1,394
PAT reported 320 344 832 1,394
WHI EPS (p) 1.60 1.72 2.09 2.80 Turnover & Profit momentum
Dividend (p) 0.25 0.60 0.85 1.10
14.0 2.0
R e v e n u e m o m e n tum
P ro fit m o m e n tum
12.0 Revenue
Performance Ratios 2009A 2010A 2011E 2012E 10.0 Profit 1.5
Sales growth (%) 14.7 35.4 44.8 23.3 8.0
1.0
EBITDA growth (%) 118.4 20.7 125.6 61.6 6.0
PTP growth (%) 196.4 28.8 120.9 67.5 4.0 0.5
EPS Growth (%) 5.3 7.5 21.8 33.8 2.0
Dividend Growth (%) - 140.0 41.7 29.4 0.0 0.0
2009A 2010A 2011E 2012E
Dividend Cover (x) 6.4 2.9 2.5 2.5
Interest Cover (x) n/a n/a n/a n/a
EBITDA Margin (%) 10.0 8.9 13.8 18.1 EPS & DPS momentum
EBIT Margin (%) 8.5 8.1 13.0 17.5
5.0 EPS 2.0
PTP Margin (%) 8.5 8.1 12.4 16.8 4.5 1.8
DPS
4.0 1.6
Summary Cashflow (£000s) 2009A 2010A 2011E 2012E 3.5 1.4
E P S (p )
2. 80
D P S (p )
3.0 1.2
Attributable 381 560 1,216 2,011
2.5 2.09 1.0
Depreciation 70 49 75 75 2.0 10.0 1.72 0.8
Working capital -5,075 -6,873 -10,051 -3,300 1.5 0.6
Other 0 0 0 0 1.0 0.4
0.5 0.2
Operating cash flow -4,624 -6,264 -8,760 -1,214 0.0 -
Net capex -38 -199 -100 -100 2009A 2010A 2011E 2012E
Operating FCF -4,662 -6,463 -8,860 -1,314
Net acquisitions 0 0 -3,700 0
Dividends 0 -110 -338 -547
Interest -2 0 -60 -75 Net Cash / Debt (£m)
Other 0 0 2,000 0 2009A 2010A 2011E 2012E
Share issues 0 0 1,830 0 0.0
Increase/(decrease) in cash -4,664 -6,573 -9,128 -1,937 -5.0
N e t C a sh / (d e b t) £ m
Closing net cash/(debt) -15,771 -22,344 -31,472 -33,409 -10.0
-15.0
Summary Balance Sheet (£000s) 2009A 2010A 2011E 2012E (15.8)
-20.0
Total Non-Current Assets 84 222 6,925 6,950
-25.0 (22.3)
Current Assets 19,257 26,892 38,500 43,500
Liabilities -16,434 -24,043 -38,800 -40,950 -30.0
Net Assets (£m) 2,907 3,071 6,625 9,500 -35.0 (31.5)
(33.4)
Gearing (%) 542.5 727.6 475.1 351.7 -40.0
NAV (p) 14.5 15.4 13.3 19.1
WH Ireland is a member of The London Stock Exchange and is authorised and regulated by The Financial Services Authority.
