1pm Plc (LON:OPM) offers a unique exposure to the attractive UK, non-bank, SME financing market. We believe it can deliver superior growth from: (i) focussed business units delivering high service levels, (ii) the market trend away from bank finance, and (iii) group synergies in funding, centralised processing and cross-selling. Credit risk is key and 1pm adopts appropriate controls in each of its units, and at the Group level. Funding risk is also tightly controlled. Recent acquisitions look well priced and create strategic optionality as well as earnings diversity. We forecast EPS growth of 27% 2019 on 2017, for which investors are paying a 2019e PE of c6x.
Strategy: After recent acquisitions, 1pm can provide all the major SME financing products through all the distribution channels. It is optimising discrete business brands with appropriate central efficiency, and the balance between broked and on-book loans. 1pm tightly controls credit, funding and customer behaviour risk.
Attractive market and market position: We see a huge opportunity to take share (current level c 0.1%) in a market showing consistent growth. The group’s above average risk is more than compensated for in a higher yield. 1pm is already delivering low teens RoE and we expect this to increase.
Valuation: We detail the assumptions in dividend discount and Gordons growth models later. The average indicates an end 2018 value of c88p (GGM 103p, DDM 72p, DDM normal pay-out 81p). The current 2019e PE of 5.8x and P/B of 0.7x appears highly inconsistent with the group’s profitability and growth.
Risks: Credit risk is a key factor and is managed by each business unit according to its own specific characteristics, with a group overview of controls. Funding is widely diversified and at least matches the duration of lending. Acquisitions would appear well priced and delivery of synergies provides earnings upside.
Investment summary: 1pm plc offers strong earnings growth, in an attractive market, where management is tightly controlling risk. Targets to more than double the market capitalisation appear credible with triggers to a re-rating being both fundamental (delivery of earnings growth, proof of cross selling) and sentiment (payback for management actively engaging the investor community). A profitable, growth company should trade well above NAV.
