albemarle and bond ABM LN
April 05, 2010 - 6:13pm EST by
2010 2011
Price: 2.38 EPS GBP0.19 GBP0.31
Shares Out. (in M): 55 P/E 12.5x 7.7x
Market Cap (in $M): 200 P/FCF 0.2x 0.1x
Net Debt (in $M): 0 EBIT 23 33
TEV (in $M): 142 TEV/EBIT 6.3x 4.3x

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I am recommending purchase of ABM LN (Albemarle & Bond Holdings), a gold pawnbroker in the UK which I believe will report a significant earnings surprise in a few months, will see estimates for 2011 rise and will experience P/E expansion. There is also a possibility that the current 29% owner of the company will announce a tender for the remaining shares.

There are two primary players in this space in the UK: H&T (HAT LN) and ABM LN - they control about 30% of the market and the rest is run by smaller independent players. I currently own both stocks but ABM LN is the one likely to have a positive surprise in the near future when it reports fiscal year 2H10 numbers after it closes its books at the end of June.

Primary Business - The regulated core operation and about 60% of profits in FY 1H10 is pawn broking gold objects. Customers are lent about 50% of scrap value with an 8% monthly interest rate and the maximum loan tenor is six months. If the client doesn't come back with the cash to reclaim their gold when the maximum period approaches, ABM attempts to contact the client. If the borrower does not show up the collateral is sold at auction where the reserve price is a bit under the scrapping price. +80% of the time the gold is actually recovered by the borrower and +90% of loans are from repeat customers. Of the gold that does go to auction, ABM is the buyer +80% of the time and the collateral is either sent out for scrapping or put on display in the company's retail jewelry showrooms.

The rest of the business is gold purchasing, about 25% of profits (a new business launched in 2/09) other financial services such as payday lending, money transfer and retail jewelry - about 15% of profits. ABM now buys gold outright (no need for pawning - just purchase the metal at a big discount to scrap price) at all of its 123 stores. 9 company locations are new 'pop-up' gold buying locations - very short lease, very low cost, very fast recovery of launch costs and profitability. It should be noted that gold purchasing has not cannibalized the core gold pawn broking business as both ABM LN and its main competitor, HAT LN, have seen their pawn loan book rising even as the new gold purchase business has been rolled out. Also, while gold purchasing is a high profit margin

Gold buying advertising started in late 2008 driven by online and TV-driven businesses where customers mail in the jewelry and later receive a check by return post. ABM and HAT entered the market about six months behind the mail-driven entrants and have drafted off the advertising spend of their rivals. The government's OFT is now investigating the newer companies as the postal firms pay very low prices for the gold they receive - pawnshops prices are low but much higher than the postal firms are paying:

Note the OFT inquiry is only aimed at the postal competitors not ABM nor HAT and the publicity of the government investigation has highlighted to the public the better value proposition of selling gold at a pawnshop where one has the opportunity to review the purchase offer and receive a higher price.

Earnings Outlook - consensus is for ABM to earn GBP0.11 in fiscal 2H10 ending 6/10 (0.247 consensus for FY10 minus the 0.142 already reported for fiscal 1H10). I expect the company to report GBP0.14-0.16. ABM reported GBP0.11 in FY 2H09 and GBP0.08 in FY 1H09. The sell-side is extremely conservative in their numbers on fears of a collapse in the price of gold as well as volumes in the new gold buying business. I expect that there will be some growth Yoy when the company reports the half year results and earnings will surprise positively because:

a) Gold buying business which is high margin wasn't even a business for ABM all of FY 2H09 (started 2/09) while it will be for all of FY 2H10.

b) Gold is now at GBP734/oz vs. an average of around GBP625/oz in 2H09. A higher gold price generates more business in the core gold pawn operation as repeat customers can borrow larger amounts against a set weight of gold, and smaller weights of gold become valuable enough to lend against. Also, the higher gold price generates interest in selling smaller pieces of gold.

Gold Price (oz) in British Pounds

3/10      1/10      11/09    9/09      7/09      5/09      3/09      1/09      11/08    9/08      7/08      5/08

733       675       719       629       571       606       643       642       532       489       461       448

ABM now has 9 pop-up gold buying locations and had zero in 2H09

c) Gold buying profits were GBP1.3M in fiscal 2H09, GBP5.2M in fiscal 1H10, and in recent conversations management indicates momentum has continued to build since the first of January

d) In addition to the pop-up format, 7 new full-service stores were also opened in fiscal 1H10 - so there will be a larger base of stores for YoY revenue comparison

e) UK unemployment is higher now than in 2H09 (7.8% vs. 6.2%)  - unemployment helps drive the business as more people need to generate short term cash either through gold sales or gold pawning.

UK Unemployment Rate

12/09    9/09      6/09      3/09      12/08    9/08      6/08      3/08

7.8        7.8        7.6        6.8        6.2        5.7        5.3        5.2

f) The financial crisis has led to banks closing branches and cutting back on subprime lending in the face of current capital constraints.

g) Gold has been rising in GBP price YTD which drives up scrapping margins (positive delta from time of purchase of gold to the time it is actually sold for scrap) (show table).

When I asked about profit growth, management cautioned me that the 8 new stores being opened in FY 2H10 will cause some operating expense drag, that scrap margins might not be as high as they had been, and that I should not expect a repeat of the +75% EPS growth FY1H09-FY1H10. But the sell side has 0% EPS growth for 2H10. So if YoY EPS growth for 2H10 is 'only' 40% for no linked period growth, then the EPS surprise vs. consensus will be 'only' 40%

Sell-side expects no EPS growth for FY11 vs. the FY10 numbers that appear to be much too low. This is a reflection of

a) fears that gold prices will collapse

b) gold buying business will collapse, and

c) there will be a strong economic recovery in the UK by the middle of next year which will drive down unemployment to less than the 12/08 6.2%.

These three points all seem unlikely to me to - especially in the next few months.

When ABM LN does report its FY 2H10 numbers the company will likely announce that the 'trial' pop-up gold buying format (remember 9 stores in place now) has been a success and the company will focus more attention on rolling out more of these low-investment, high-return outlets in the next 12 months. We will also get some metrics regarding the progress of the new traditional stores that have been opened in the last year - high unemployment, high gold price and gold buying has been driving business to these stores and leading to a faster return on investment than in the past.

In the face of a significantly higher store count (both pop-up and traditional), a grinding Recession, and generally high gold prices I expect the Sell-side will have to raise its estimates for FY2011 from the current GBP0.25 which would represent a drop from my FY2010 estimate of GBP0.30 to a range of GBP0.30-.32

ABM LN currently trades on 9.65X the 'too low' FY2010 numbers. While I don't expect a +15X P/E on this name, I wouldn't be surprised to see a bit of P/E expansion from

a) EPS surprises

b) Room for continued organic and roll-up growth. 50% of UK gold pawn shops are mom & pop operations. There are only ½ the pawn shops per population in the UK as in the US and there are many towns and small cities that do not currently have a gold pawnshop.

c) A larger percentage of stores are immature and less than two-years old which bakes in some latent earnings growth for the company.

d) Almost no credit losses (tiny payday lending causes what does little that does occur)

e) Gold lending offers much lower borrowing rates to the low-income customer base vs. unsecured lending.

f) potential for consolidation - a HAT LN and ABM LN merger would make sense and/or

g) An increased awareness that ABM LN offers a play on both an extended UK Recession as well as a weakening in the Pound vs. Gold after the BOE's large campaign of quantitative easing.

Finally, 29% of ABM LN is held by EZCORP (EZPW) which is a pawn shop operator in the US. This pawnshop company is +5X the market cap and has a higher p/e than ABM LN's (11.7X vs 9.6X). Both companies have similar ROE/ROAs despite the UK company only recently leveraging its franchise and starting outright gold-purchase operations out of its stores. Arguably, the UK company has a higher near term potential growth rate due to the lower level of national pawnshop penetration, less competition, gold purchase, etc.  A buyout of the remainder of ABM LN by EZPW is always a possibility.

So I can come up with a target of GBP3.7 based on a forward of 12X P/E on estimates of GBP.31 for FY2011 (12.3X trailing P/E). I believe we can get there by the end of 12/10 after FY 2H10 comes in around GBP0.15 for FY10 EPS of GBP0.29 and forward estimates are increased. Return would then be +50% in share price not counting a few percent from the dividend.




- 30-50% earnings surprise likely when fiscal year-end results (June, 2010) are announced

- 2011 estimates likely to rise

- P/E likely to expand

- gold buying 'pop-up' store format trial likely to be decalred a success and roll-out expanded

- gold price in Pounds rising would be a major positive  (UK government finances are a mess)

- consolidation in the market as smaller players are bought out/rolled up

- a long Recession and/or slow recovery (as per consensus) would be a positive for the business and EPS

- buyout of the company by its 29% owner

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