In times of economic strife, pawnbrokers typically see a pick-up in trade as cash-strapped individuals seek ways of getting money to help pay the bills. Business is certainly booming for pawnbroker H&T (HAT:AIM) whose share price has more than doubled since October 2020 and up by more than 60% over the past year alone.

In recent years H&T, which also sells high quality new and pre-owned jewellery and watches, has rerated from an asset-backed income stock to an exciting growth share geared into the inflation-induced squeeze on customer finances.

The shares remain attractively valued, trading on a single-digit multiple of Shore Capital’s 2023 and 2024 earnings estimates and offering a ripe dividend yield of 5%.

WHY IS PAWNBROKING MAKING A COMEBACK?

Pawnbroking struggled during the pandemic as lockdowns blocked off many avenues for spending and enabled people to pay down debt, but the industry is now experiencing a boom as financially distressed customers seek cash to help make ends meet.

A loan from a pawnbroker is appealing during straitened economic times as it is often the easiest way for consumers, many with poor credit histories, to obtain a quick loan and help pay their bills. Given the worsening UK economic backdrop, investors have bid up the share prices of H&T and rival pawnbroker Ramsdens (RFX:AIM) accordingly.

HOW IS H&T POSITIONED?

Founded in London in 1897 as Harvey & Thompson, H&T celebrated its 125th anniversary in 2022, a year of strong growth across the business.

First-half results to June 2022 showed a 43% surge in pre-tax profit to £6.7 million amid continued momentum in the core pawnbroking business. Shore Capital forecasts full year adjusted pre-tax profits jumping from £10 million to £19.1 million with year-end net asset value per share of 377p. It estimates the company will grow pre-tax profits to £32.6 million in 2023 and £39.2 million in 2024.

Last year saw H&T acquire watch servicing and repair centre Swiss Time Services for £4.3 million in an earnings-enhancing deal that adds a new skill to its product offering.

The Sutton-headquartered company then raised £16.9 million of fresh capital by issuing new shares at 425p to support loan book growth and store estate expansion. Tellingly, chief executive Chris Gillespie and finance director Diane Giddy both participated in the fundraise, demonstrating their confidence in the outlook.

H&T IS THE MARKET LEADER

Speaking to Shares, Gillespie points out that over a decade ago, the UK pawnbroking market consisted of roughly 2,000 shops. Today, that number has dwindled to about 800, but H&T is a much bigger business than it was back then and is now the largest pawnbroker in the UK.

Before 2019, H&T’s growth strategy was mainly orientated around unsecured personal lending, which the company went into ‘with gusto in about 2013/2014’, says the CEO, but H&T has since exited the unsecured lending market.

‘We’re now focused on what we’re good at, pawnbroking and jewellery retail. And we do other things such as foreign exchange, holiday money, cheque cashing and Western Union money transfer,’ he stresses. In fact, H&T is Western Union’s largest UK carrier by transaction volumes and that service attracts many people to its stores.

HOW DOES PAWNING WORK?

Put simply, a pawnbroker lends money based on the value of a customer’s item. After the customer hands over the item – the official term for this is ‘pledged’ – the pawnbroker securely stores the item until the customer pays the loan back in full, plus interest.

Pawnbrokers offer secured loans, which means money is lent against personal property. For those that need to borrow money but can’t get a traditional loan or credit card, a pawn shop can offer a helpful alternative.

WHY IS H&T WINNING?

Trading is improving as the company catches up on historical underinvestment in stores and IT. Furthermore, the broader market for lending small sums of money is shrinking due to tighter regulation making that activity uneconomical for many firms, yet that gives H&T an opportunity. ‘Our median loan is £200. People now need to borrow and are finding that the chances are whoever they used to borrow from isn’t there anymore, and we are.’

Inflation is also eating into peoples’ disposable income, so they are turning more to pawnbrokers.

IS THERE SCOPE FOR FURTHER GROWTH?

Gillespie believes that with 270 shops, H&T speaks for around 60% to 65% of the UK pawnbroking market by size of pledge book. The next biggest listed pawnbroking player is Ramsdens, though pawnbroking isn’t its core business and the company’s pledge book is less than 10% the size of H&T’s.

‘Most of our competitors are local businesses that have one or up to five or six shops, and in any one location they would be a fairly potent competitor, but they don’t figure on a national market share scale,’ he explains. ‘We are by a considerable margin the largest and that’s a combination of geographic reach and focus nationally.’

SECOND-HAND PRODUCTS PROVIDE EXTRA SPARKLE

Shares readers might be surprised to learn that H&T is the sixth largest jewellery retailer in the UK. ‘Between 82% and 85% of what we sell is pre-owned,’ enthuses Gillespie, ‘and pre-owned is the growth segment of the jewellery market, particularly watches.’

Benefiting from increasing demand for second-hand jewellery, H&T is also profiting from the desire for customers with surplus cash to build a store of value, which can sometimes be sold back to the pawnbroker or pledged as collateral for a pawnbroking loan in the future.

Gillespie tells Shares the group’s pre-owned offering ranges from a pair of earrings for a tenner at one extreme to watches up the £20,000 to £25,000 range at the other. ‘Our average watch is a bit under £1,000 in terms of price, so a sizeable purchase but an aspirational one for a normal person,’ he explains.

Swiss Time Services looks a savvy acquisition for H&T, which sends thousands of watches a year away for servicing and repair before putting them up for sale. ‘We will increasingly bring that work, and the margin on that work, in-house and we’d like to offer a care and repair service to our customers,’ says Gillespie.

A high gold price benefits the gold purchasing business, which goes hand-in-hand with pawnbroking, but Gillespie says gold buying has become a much smaller proportion of the business than was historically the case.

Gold price movements have limited impact on H&T’s pawnbroking because its typical loan is a few hundred pounds and almost no impact on the price of a piece of retail jewellery. 

IS H&T ONLY A SHORT-TERM WINNER?

‘The rate of growth that we’ve seen over the last 12 months or so and the store openings means that we are consuming rather than generating cash and that’s why we did the capital raise,’ says Gillespie, who believes countercyclical H&T can continue to flourish even in a more benign economic environment.

‘I’m not sure the supply of small sum credit issue is going to change any time soon,’ he explains. ‘That environment will be with the economy for a while and therefore pawnbroking is a growth opportunity for quite some time.

‘And as economic conditions become more benign – I’m not sure that is going to be the case for a year or two – you’ll probably see the jewellery retail side of our business being slightly larger in terms of its growth potential and trajectory. At the moment, more of our growth is skewed towards the lending side.’

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