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(Sharecast News) - Berenberg upgraded S&U on Friday to 'buy' from 'hold' and lifted the price target to 2,310p from 2,220p as the bank becomes increasingly positive about the medium-term outlook following the company's first-quarter update this week.
"We make no changes to our estimates in this note but reframe our investment case following a change of analyst," Berenberg said.
Berenberg said that according to its Q1 update, S&U is edging closer to agreeing a new funding facility, which it thinks could increase its existing available debt of around 330m by an additional 300m over the next three years.
"We expect that this additional funding should support net receivables growth of 20% CAGR from FY26 to FY29E from 497m to 857m," it said. Berenberg estimated that this growth and funding mix could drive an improvement in return on tangible equity from 9.5% in FY26 to 12.4% in FY29E, and earnings per share growth of 16% CAGR from 195p in FY26 to 306p in FY29E.
"We see the company delivering these expectations while improving its dividend payment further, resulting in a yield of circa 7.5% in FY29E," it said.
The bank said S&U should be able to use its increased funding to take advantage of a large and growing market in both of its divisions, Advantage Finance and Aspen Bridging.
"We believe that Advantage's end-markets are buoyed by a more stable regulatory environment than that of the previous two years, while we think demand for motor finance should remain sticky through-cycle," it said. "In Aspen, we see decreasing affordability of homes, together with more onerous government regulation in the buy-to-let market as key demand drivers."
Berenberg values S&U on a price-to-tangible book value per share multiple of 1.0x, resulting in a price target of 2,310p.
"As returns improve, we believe a multiple of 1.0x is appropriate," it said, noting the company's attractive dividend policy, and the sector discount that currently weighs on the specialist lender segment of the market.
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