Recommendations » UK

H&T Group (LON:HAT) report: Sell-off unwarranted, buy ahead of finals

Contributed by Daniel Stewart & Company

By Daniel Stewart & Co

- H&T has sold-off by 17% since its trading update on 22/1. This seems unwarranted given the statement guided that FY’09 results would be towards the top end of market expectations (implying 2-3% upside to our own earnings forecasts). The early caution shown with respect to 2010 guidance was only to be expected given there can be little certainty on gold purchasing volumes so early in the year.

- We believe the level of de-rating is unjustified for 2 reasons:
1 Growth in the underlying business – H&T’s store portfolio and pawn loan book continue to grow strongly and indeed the average break-even period across the store estate has now been halved. We expect this core business to be the driver of long term growth in Group earnings.
2 Upside risk to forecasts from gold purchasing – clearly FY’09 has been an extraordinarily lucrative period for H&T’s gold purchasing activities. Indeed, this has been factored this into our 2010E forecasts, which assume a $900 gold price (some 19% below the current fix) and zero contribution from the Group’s new retail mall units (RMUs). We expect that were the RMUs to produce revenues of just one third the level forecast in 2009, then it could add between ?2m and ?3m to Group gross profit.

- H&T now trades at a 25% discount to its sector peer Albemarle & Bond (taking Fidessa consensus forecasts). We see no justification for this rating discrepancy and recommend buying H&T ahead of final results on 25 March.