Occasionally on the market, something of an anomaly crops up, where the share price just doesn’t appear to reflect the true value of a business.
Such appears for me to be the case with TIME Finance, the AIM quoted business that occupies the space of lending money to small and medium sized businesses (SME’s) throughout the UK.
Although this isn't an area that I often frequent, it is nevertheless worthy of taking a closer look or even an interest as I have elected to do, as it can duly throw up some rewarding plays over time.
It is also an area that includes a vast amount of players away from the space occupied by big banks and majors where it is somewhat fragmented. That of course provides scope for a degree of consolidation and acquisition driven deals which in turn can drive and deliver growth opportunities.
In the case of TIME, whilst in the past it has made various bolt-on-buys, it is now, following a refreshed management team and a concluded restructuring very much focused on delivering organic growth, the fruits of which appear to be evident from the release of what were excellent interim results yesterday.
What’s more, the company expects a full year outcome significantly ahead of expectations, which sees the shares trading on what is best described as something of a miserly rating.
Off the back of yesterday's news, the shares responded positively on the back of very heavy volume, although as I write they trade on a PER of below 8 which falls to under 6 for next year.
Whilst that puts it firmly in the discounted area, the Broker also highlights risk to the upside, which could see an upgrade ahead, which would result in the discount here looking even more pronounced.
To hear more on the business and what appears to be a successful turnaround situation gathering momentum, I have been fortunate enough to speak with the CEO Ed Rimmer along with CFO James Roberts.
The two execs not surprisingly expressed pleasure with the results sounding a cautious, but confident note on the year ahead and beyond, where Rimmer, first provided some background as to how the business has really moved forward over the last year.
Looking back, the CEO says that the company was previously known as 1PM where it operated primarily in the soft asset finance space.
During 2015 and 2016 it made a number of acquisitions in both the soft and hard asset areas, along with invoice finance businesses.
The first two asset areas are differentiated, with soft being in the mould of intellectual property or the likes of light leisure equipment such as furniture etc, with the latter, more akin to heavy machinery such as diggers or printing presses, although both embrace a multitude, where businesses require need capital for investment and purchases.
There was, says Rimmer, even a couple of non-core offerings, such as a second-hand vehicle leasing business along with a consumer second charge mortgage arm focused largely on buy-to-let.
The result of these various arms was a group of differing brands trading separately, which the CEO adds had resulted in too many being acquired too quickly, which in conjunction with the onset of Covid saw the business actually going into reverse.
It was also severely impacted by the Government loan scheme that was ushered in following Covid hitting, which not surprisingly saw small businesses taking up what was a cheaper option on offer.
Rimmer, who joined the company in 2017 as COO, following a successful period as UK CEO of Bibby Financial Services was elevated to the position of CEO at TIME in June of 2021, which resulted in his plan to focus purely on its core strengths and get the house in order.
This saw a firm concentration on its own book lending as opposed to brokerage business, which aids building balance sheet strength and ultimately increasing the worth for shareholders.
The strategy has, over the last eighteen months seen Rimmer and his team firmly focused on the hard asset space, which he describes as a more secure market that is easier to define, along with invoice financing as they duly exited the consumer finance brokerage space.
There is also to a lesser extent continued exposure to some soft asset related business, which the CEO says is well spread and brings in some decent returns.
During the transition period the company also rebranded as a whole, migrating the business to the TIME format, which along with a more defined focus also saw a cutting back on some locations which collectively has resulted in notable progress feeding through in the last six months.
Of course, having delivered very strong Interim Results which we will come to shortly, it is worth touching on what must surely be a difficult environment, given the teetering on a recession and a negative growth outlook.
To this end Rimmer says that obviously bad debts are topical now and it is something that TIME as a business has to manage on a day to day business adding that there will always be bad debts.
That said, he adds that boom and bust always brings opportunities for businesses such as theirs, whereas Banks regress, the more personable approach that TIME offers can score at the front end.
Whilst the front end of the business scores, equally, he says that close attention is paid to the back end, where you need to have the right processes in place to mitigate any potential downside.
Despite the choppy economic climate the Interim Results as mentioned at the outset were extremely positive as CFO James Roberts explained. “We saw significant growth over the last twelve months with the key indicators all going the right way and that includes arrears or deals that have gone wrong which have shrunk, so everything is going in the right direction”.
He also cites the gross lending-book as being at a record, standing at £152m as of November 2022, which is an increase of 27% on the corresponding H1 period.
Importantly, its own-book lending origination also saw marked improvement moving to £36.6m, whilst net tangible assets increased to £32.1m representing an 8% beat on the prior period.
On the profit front, this saw a hugely significant improvement on last year, moving to £2m as opposed to the corresponding £1.2m, on revenue of £13.2m.
The numbers see TIME having already exceeded half of broker Cenkos full year profit forecast, which arguably leaves the door open for an upgrade further down the line.
A real key element appears to be a concentration on targeting larger and secured loans which come from a keen focus on the hard asset space.
The average deal now comes in at £26k although at the top end can be up to £250k, with a sweet spot cited as being between £10k-£50k.
Yields that can be expected for these range between 8%-18% with funding coming primarily from challenger banks, which are usually the online players without a High St presence.
The area of Invoice Financing is also lucrative and the fastest growing area for TIME, which sees finance agreements operating in a sweet spot of £200k-£400k and yielding between 10%-20%.
There are differing arrears of Invoice Financing, which is essentially an advance against the sale ledger which gives businesses access to the value of an invoice that has been issued to a client or customer but not yet paid.
The board is keen to grow further across this area and in conjunction with other positive factors, Roberts believes that with the book having really improved, good visibility, a strengthened balance sheet and improved NAV, the current market valuation is something of a mismatch.
He concludes by saying that with cautious optimism they believe the strategy is clearly working which brings with it a compound nature and they are looking forward to providing bigger and better numbers as TIME moves forward.
Although the share price has failed to make much headway and continues to look palpably cheap, that should change if the numbers continue to come through in the current measure, thus hopefully rewarding the patient investors.
Aside private investors holding the shares there are a couple of majors sitting on sizable stakes, one of which is extremely interesting and relatively new to the shareholder register.
That comes in the form of Arena Investments which is a global Institutional Asset Manager of a serious size with a particular focus on special situations. It is therefore intriguing to see its presence here with a 19.9% holding.
Given one of the stated aims of the TIME board is to further strengthen the balance sheet, one wonders whether a big hitter such as Arena could in some way play a part.
Whilst both CEO and CFO say there are no plans to undertake a raise and that they believe the medium term plans set out can be delivered organically, equally, they add, if the right opportunity or something specific came along, they would no doubt have a look at it.
Given the fragmented nature of the market in which it operates, there are clearly opportunities for consolidation, which begs the questions as to whether TIME could be in the hunt for further bolt-on-buys.
Rimmer says that coming through Covid, following previous acquisitions they were keen to stick to the knitting and implement the plans and get things right with the existing businesses.
With that done and demonstrated he adds that there are however potential opportunities to overlay into the core divisions, but they certainly wouldn’t look at anything outside of those. “If there was a small opportunity that came up that we thought was worthwhile pursuing, or a more material one that we could fund, then we would definitely have a look. The key thing though, is that it would have to be consistent with our group strategy and what we are doing”.
He also says that the current market climate lends itself to that and if embarked upon would take the company into a different dynamic to where it has been in the last couple of years.
Returning to Arena’s presence, Rimmer says that there was no previous relationship with them at all and that they, at TIME, really didn’t know much about them when the stake was taken, with it being predominantly a US player.
Subsequently though, the CEO says there has been some engagement with them, where he adds that they are very active in supporting and funding smaller players in the alternative finance space.
Expanding on the stake taken he says, “they have been very much out of the US to date, but set up a European office in London to try and make some in-roads into Europe and follow the same strategy as that of the US, although clearly a very different market. So it isn’t a completely strange decision for them, as it is consistent with what they have done in America, getting involved in shareholdings and they do have the opportunity to deploy funds into these businesses as well. That helps businesses grow, which ultimately helps them gain a return on their shareholding and that is something that has been talked about, but nothing more than that at the moment. They are open minded about what they can do, but that’s about as much as we have gauged at present, but we do have a regular dialogue with them which has been quite passive at the moment”.
Whether that passive nature changes in due course is anyone’s guess, but one could reasonably assume that given the large stake taken and the firepower it has at its disposal, that any support to accelerate growth at TIME should ultimately reward other investors too.
For now though, the picture looks to me positive in the near and medium term with organic growth on profit and earnings, where the discount looks unwarranted and is surely due a sharp rerating.
Broker Cenkos has full year 2023 revenue pencilled in at £25.7m with pre-tax profits at £3.2m and EPS of 2.9p. Given that the company has stated that the profit before tax will be not less than £3.2m, it is quite possible that given such a strong first half, that figure will be exceeded, which would further highlight the value proposition.
Looking ahead to next year the forecast from Cenkos is for revenue of £29m and profit before tax of £4.6m as EPS is expected to jump to 3.9p. On that basis, the shares at the mid-price of 22.5p trade on a forward PER of 5.7, which look far too cheap to this writer, hence I have an interest having bought into the story.