It was back in January of this year that I penned my introductory piece on TIME Finance, the shares then standing at 22.5p which followed my initial purchase at 19p.
Then, prospects looked extremely good for the business with the shares trading at what appeared potentially bargain territory.
Roll on nine months, where despite the shares now standing at a more elevated 27.5p, they continue to look cheap after delivering extremely positive full year 2023 results that were released earlier this week. Add to that, a notably positive start to Q1 2024, which has seen momentum continuing and revenue up 21% to £7.6m, then one wonders just what it will take to drive the shares to what could be considered a more realistic rating. As for the business, to recap, TIME is a funder to smaller and medium sized enterprises (SME’s) where it currently has an increased and growing gross lending book standing at £176m.
It has also, in more recent years, restructured to focus on its core business strengths along with new growth opportunities that has included the provision of invoice financing.
The latter has made a positive contribution to the overall performance of the business since its conception and the company has seen strong growth in the numbers, increasing by 128% from the £25m seen in 2021 to the current £57m. The range in deal size here runs between £50k-£2.5m with what is described as a sweet spot of £250k-£500k.
In the case of asset lending, both soft and hard which spans anything from office furniture to heavy machinery this runs from as little as £1k-£750k where the ideal is described as being in the £15k area for soft and £100k for the harder assets. Looking at the full year numbers which had seen an upgrade earlier in the year from broker Cavendish, there has been a notable improvement in the loan book expansion which has in turn driven growth in profit.
Revenue for the year increased 17% to £27.6m with pre-tax-profit jumping markedly to £4.2m, which was actually slightly ahead of the previous upgraded numbers.
Importantly, for a business like this, which will always have to make contingency for arrears, the area remains comfortable and overall registered a fall in percentage terms.
With Cavendish forecasting revenue for the current year to move to £30.1m with a pre-tax profit of £5m, adjusted EPS should come out at 4.3p with normalized EPS of 4p per share. On that basis, the shares trade on a PE of little more than 6 which falls to 5.5 for next year, looking highly attractive to this investor. Having previously spoken with CEO Ed Rimmer back in January where he outlined the business and its direction to me, I thought now was an ideal time to catch up once again, given the positive results and the apparent continued momentum.
Rimmer is certainly pleased with the performance of the business and the execution to date on the previously outlined roadmap along with the ongoing growth strategy for the business.
As with shareholders however, there is a matched level of frustration with the share price performance to date, in it not reflecting the value and progress that has been made and delivered across the business. Speaking with me on the drivers of what has been a highly impressive result against the prevailing economic backdrop the CEO is happy to expand on what has been delivered. In terms of the environment in which TIME operates, Rimmer says that it has actually proven to have been very much a mixed one.
This is largely down to the product mix that they have, with the invoice financing, which is very much focused on providing working capital alongside the asset finance business that is aligned to companies purchasing equipment and machinery.
Expanding further he says “at the start of the year I thought there would have been a lot more focus on the refinancing of kit, but that hasn’t necessarily been the case, as yet.” That said, he adds that they have still maintained a good flow of hard asset business and pretty much to budget in most months, if not above budget coming through.
Having now moved into Q2, this is what Rimmer describes as their traditionally busier time in the run up to Christmas and he says that it will be really interesting to see what transpires, particularly after successive interest rate increases.
“It has been a bit up and down and mixed and we’ve not seen the refinancing business coming through that we thought we would see, although the investment in new machinery has still taken place. The invoice finance book has continued to grow, but probably not at the levels we thought, although the average deal size has actually been higher than we expected. So, the income that we have attracted from the deals has been higher than we had envisaged.”
Obviously, something of a mixed bag across the business, but which has nevertheless delivered an excellent result on the overall performance, with highly impressive numbers being announced against that difficult backdrop. In terms of the more recent interest rate trend, Rimmer also tells me that they have passed on the majority of the interest rate rises into the client base, but importantly within that, this hasn’t impacted on their volumes.
That has to be viewed in a positive light and is arguably a demonstration of the underlying strength and balance of its business and clients.
Clearly though, the fear for those operating in the lending space is that of bad debts and insolvency, something that is likely to rear its head at some point. That said, the CEO sounds as comfortable as one can be in regard to this aspect.
“The commentary around the insolvency market is that things aren’t going to get any worse" he says, "but forecasts are also for a technical recession in the second half of the year.” However, Rimmer adds that it doesn’t feel like a bad downturn to him, rather, coming across more akin to pre-2008 trading when interest rates were at a similar level as to where they are today and what can be viewed as something more of a norm historically. In relation specifically to TIME on the arrears front he says, “the difference between the old business and what we have got now is that we now have much better and stringent control processes in place and people in the business to manage that bad book when it sometimes goes wrong. Things will always go wrong with small businesses such as overborrowing or failing and that is the nature of it, although they are few and far between.”
He expands further by telling me that they keep a very close eye on any potential issues which is not done through the likes of algorithms, but via hands on people within the business who are highly tuned and adept at identifying potential issues early.
That strategy appears to be proving its worth to TIME and Rimmer says that he is quite happy with where they are within the arrears aspect, as whilst the lending book has been growing, those arrears have remained roughly the same which percentage wise looks a good or better result than one would have expected.
In terms of where the business is currently at, the CEO confirms to me that he is comfortable with the broker forecasts that are in the market. “Probably for the first time, I am more comfortable now with what is out in the market than I have been since I have been involved with the business. When I came back into the business coming off the back of Covid, there were two or three years of underperforming against the numbers.”
Having completed the last two years and delivered what they said they would, Rimmer also adds that they have got more confidence around this current year and next year and the overall confidence in those numbers is much better than it was twelve and certainly twenty-four months ago. “We were quite cautious, because the last thing I wanted to do was over promise and under deliver, because we just couldn’t afford to do that” he concludes. That theme should play out well with holders of the shares or those sitting on the sidelines with a view to perhaps investing.
With such a positive outlook and a level of confidence on the numbers front stated, from an investor perspective one would hope for a more notable increase on the share price front in due course.
Commenting on this, Rimmer says “The current valuation just isn’t reflected in the value of the business and the numbers we have put in place over the last two years, so yes, it is frustrating.”
One element that could prove attractive to investors and which for now remains elusive is any dividend on offer, despite the growth and increasing profits and this is an area that is far from lost on the CEO. “We are going to revisit this again mid-year when we can look at the trading and figures, so I do get it as something that we could do.”
On the other hand, he adds that when they talk to the Institutional investors, being a different audience than the private investor base he says that they have a different view on dividends at this stage and see TIME as a business that should absolutely utilise the cash for further driving growth.
That, therefore presents something of a dilemma in the coming months for management, although from a personal perspective as much as I enjoy dividends like the the next person, I rather concur with the majors.
The commencement of a small dividend can often be interpreted as nothing more than a token gesture, so for me, TIME would be better off putting the cash to further work on growing the business and only opting for dividends when it can be meaningful and subsequently progressive.
In our previous conversation, Rimmer informed me that there had been little in terms of contact or dialogue with its more recent major shareholder Arena which sits on close to 19% of the company, so I was keen to hear if anything has changed on that front. The CEO informs me that they have subsequently met with them more than they had back then, including after the results just announced, where he concludes that they are having a bit more dialogue with them.
However, he also adds that whilst that dialogue has been cordial and professional, nothing has changed in terms of actually knowing their intentions. “They have taken a stake and are very open minded about trying to lend money into the business to try and help it expand which is of interest, but that of course isn’t cheap money”. There isn’t anything more to add to Arena’s presence at this point other than reiterating what I penned previously in that in the past, elsewhere, Arena has proven something of an active investor as opposed to one of a passive nature. TIME has certainly delivered with substantial progress being made in terms of delivering on its previously outlined four-year plan to double its own lending book and that looks set to continue.
Broker Cavendish comments “The strategy to focus on secured lending is demonstrated by the 30% increase in the Invoice Finance book to £56m, and 55% increase in the Hard Asset book to £56m. The split between own-book lending to broked-on lending increased to 96%:4% (FY22A: 87%:13%), but shows it maintained the ability to broke-out business that falls outside of its credit risk policies. Future growth is underpinned by c£50m of headroom on its lending facilities.”
For further expansion on the positive progress made and the direction of the business Rimmer points to the successful exiting of specific non-core areas of business, the strengthening balance sheet and a subsequent growing of its own book.
In particular for the latter, he points to the level of split in its own book against broked-on volumes where at the end of the first quarter they were up to 97% against 3% broked-on. That represents a marked change against the levels of some years back prior to the altered strategy, where the split then stood at 70%-30%.
Looking ahead, the tangible net asset value is expected to be £43.4m by the end of the next financial year compared to a current market cap of around £26m.
On that basis, particularly in light of the recent trend, if the shares continue to mark time the company could prove to be vulnerable to an acquirer looking to make an opportunistic bid.