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Questor: watchdog’s review casts a shadow but this pawnbroker has just raised its divi by 41pc

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Our initial analysis two years ago of H&T, Britain’s leading pawnbroker, has yet to yield any paper profits, largely thanks to shadows cast by an ongoing regulatory review by the City watchdog of the firm’s unsecured high-cost short-term loans business.

However, the core pledge book and retail operations appear to be performing well, if last week’s full-year results are any guide, the balance sheet is sound and the shares look good value on a yield and book value basis.

Concerns over the regulator’s inquiry could yet hamper the shares’ progress. The high-cost short-term loan book generated £4.3m of revenue in 2021, down from £8.1m in 2020, and that decline was a key reason for 2021’s fall in stated pre-tax profits to £7.9m from £15.6m.

There could be further hits to the profit and loss account. But the high-cost short-term loan book has shrunk to £3.1m and H&T has already booked a £2.1m provision to prepare itself for the regulator’s findings and likely demands for compensation for customers. If that proves sufficient, the uncertainty could lift and investors will be able to assess the merits of the core pawnbroking and retail businesses.

At a time of sticky inflation and pressure on households’ cash flows, these operations could see increased demand, even after 2021’s 39pc increase in the pledge book to £67m and a 22pc gain in retail sales, via both the physical estate and the website.

Management’s decision to raise the full-year dividend to 12p a share from 8.5p speaks of confidence in both a regulatory resolution and underlying trading. A forecast dividend yield of 4.5pc and a price-to-earnings ratio of less than 10, based on consensus’ analysts forecasts, both suggest that the shares are decent value.

Better still, net shareholders’ funds of £137m compare with a market value of £122m, so the shares trade at a discount to net asset, or book, value. Even if we strip out £20m of goodwill and intangible assets, the shares trade roughly in line with tangible book value and that will hopefully provide protection for the share price.

Patience may yet pay off at H&T. Hold.

Questor says: hold

Ticker: HAT

Share price at close: 313p

Update: Inspecs

With the benefit of hindsight, this column has in all honesty recently fluffed its chance to book some fat profits in names such as IP Group, GB Group and Strix, and seen them come rattling back down.

While second-guessing market sentiment, and trying to time share sales and purchases perfectly, is a mug’s game – and events in Ukraine are impossible to anticipate – the themes of rising interest rates and rising inflation may continue to work against consumer stocks or those companies that are trading on high ratings thanks to their perceived long-term growth potential.

In this vein it may be time to very reluctantly book profits in eyewear specialist Inspecs, especially as we have made a gain of nearly 72pc relative to our tip in July 2020.

This is not to suggest that anything is going wrong at the company. A trading statement last month reported a big leap in sales, boosted by the 2020’s acquisition of Eschenbach, a German rival. An end to Covid restrictions should help opticians provide their full range of services and cement demand for branded or private-label glasses, sunglasses and safety wear, while further Swedish and German deals will increase Inspecs’ brand range and distribution reach.

However, the shares have done well and Inspecs has yet to break into the black on a statutory basis, so its market value of £336m already prices in a good degree of future growth.

Moreover, rising interest rates are rarely a good thing for highly priced growth stocks, no matter how well run they are. This is because the “discounted cash flow” models that can be used to value secular growth stocks have to use a higher discount rate as interest rates rise.

A higher discount rate lowers the “net present value” of future cash flows and thus decreases the theoretical value of the equity and thus the shares. It is just a function of mathematics.

Time to (reluctantly) take profits and look elsewhere. Sell.

Questor says: sell

Ticker: SPEC

Share price at close: 335p

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