The smaller businesses with big potential and why the time is right to invest
Hopes that H&T (HAT:AIM) will largely escape the pressure on gold buying which lies at the heart of last week’s (18 Apr) profit warning from peer Albemarle & Bond (ABM:AIM) may well prove wide of the mark. The pawnbroker’s own half-year trading update, usually published in June, could prompt analysts to reassess their bullish outlook.
Both firms have used a previously elevated gold price to ramp up short-term gold buying operations in order to fund a near doubling in their store estates over the past three years. The precious metal’s retreat looks equally ominous for the pair. H&T is a stronger company but a 5.4% share price correction compared to a 38.7% retreat in Albemarle & Bond since the alert assumes it will be largely insulated from market forces.
The market has seen this all before. Albemarle & Bond’s disappointing full-year trading statement last summer (15 Jun ‘12) was followed a week later by news of H&T’s own earnings miss for its interims (21 Jun ‘12). Those alerts came in the wake of a 10.5% gold price retreat from 2012’s peak of $1,786 (28 Feb ‘12) to $1,598 at 30 June 2012.
Shareholders will take comfort from the reduced scale of H&T’s GoldBar pop-up gold-buying units. The estate stood at 24 as of 31 December 2012 against 55 at the end of June. The £98 million cap nevertheless grew its core pawnbroking footprint over the period by 12 shops to 186. By comparison £66 million cap Albemarle scaled back its pop-up estate by less, from 50 to 43 in the second half but grew its core estate at half H&T’s rate, up six units to 190 at 31 December 2012.
Albemarle’s £50.3 million net debt at the end of last year was nearly twice that of H&T’s £26 million at the same point. Coupled with cover of less than two times, using the consensus earnings per share (EPS) forecast of 22.4p, this means its expected 12.4p dividend payout could be at risk of a cut. There has to be a danger H&T warns on profits too. This year’s forecast 33.4p EPS looks exposed after gold’s 15.9% retreat from its $1,694 year high (22 Jan), even if the 12.3p projected dividend payout appears much more sustainable.
Shares says: The consensus is too sanguine and we would expect investors to sell H&T at 265p.