Albermarle & Bond (ABM)

A 24 May update asserts "the business continues to perform strongly" and results for its financial year to end-June in line with expectations.
capitalising the group at £133 million,

this implies a forward price-earnings (P/E) multiple of about 10 times and yield of 4.4%.



Cost pressures likely to affect many British households as wages and pensions get frozen while inflation and VAT are liable to edge up, pawnbroking looks set to remain a sweet spot.



There is a slight twist in the investment case given ABM combines pawnbroking with jewellery retailing. It makes long-term strategic sense because pawned jewellery can be sold on and in good times people often pawn an item to buy a new one.



It also helps to smooth profit from the different activities over economic cycles however 'jewellery retailing' likely explains the turn in sentiment towards ABM. Management cites continued slowing in demand for retail jewellery "however this has been more than offset by the overall performance" also because ABM has opted to scrap items earlier to exploit high gold prices rather than re-sell the jewellery.



Pawnbroking currently represents 60% of gross profit and is performing well, its pledge book showing 10% year-on-year growth - "a good indication of the company's underlying performance" management says. Gold buying has remained consistent with strong performance in the first half (ie second-half 2009) likewise margins despite higher competition. Rising gold prices amid global financial jitters are a promising context for pawnbroking, hence ABM's pioneering 'pop up' gold buying shops is nicely timed. Nine of these have been established typically in shopping malls with low fit-out costs and flexible three to six-month leases, and a further six are targeted to be open by end-June.



Jewellery retailing represented 20% of profit in the last financial year, so there is not a significant aspect of group business at risk - furthermore we have already seen from ABM's interim results that despite the anticipation of recession, gross profit on the retailing side only slipped from £5.1 million to £4.2 million like for like. So the market's recent caution looks overdone.



The financial services side, which represented 12% of group revenue and 16% of profit in its last financial year, has continued to deliver improvements.



Towards future growth, at least 15 new pawnbroking stores are expected to have opened in the current financial year with break-even projected within the first 12 months. These are being funded by organic cash generation, a healthy sign, taking the total number of stores near 140. There is £17 million headroom against banking facilities hence scope to support further openings.



Considering also, a five-year growth plan with new senior management appointments already made, it is a bit curious how brokers' forecasts project flat or even declining profit for ABM's 2010/11 year. Company REFS shows the consensus looking for growth in normalised pre-tax profit from £14.7 million to £19.7 million in the current year, then £190 million in 2010/11. However last February Collins Stewart, ABM's broker, projected modest growth for the next financial year. This cautious outlook, also P/E multiple relative to recent years when it breached 20 times despite lower profitability, means ABM deserves ongoing attention.



If management can deliver on its five-year plan, then considering the last five years (from £5.6 million pre-tax profit) this is going to result in one of the most impressive long-term growth records in the market. Dividends have also grown significantly with earnings, for example from 4.0p a share in 2004/05 to 10p projected for ABM's current year.



Management clearly has a good story to tell and is trying to get it across, hosting analyst and investor visits at its stores today. This quite explains the trading update, so all investors are informed as to current progress. Possibly this event will stimulate further institutional interest in ABM although the business fundamentals stand on their own merits, to reconsider the shares.