Institutional and retail investors are beginning to warm to Davenham, the asset-based lender to small and medium-sized companies that joined the market at the end of November.

Initially some were wary of backing the float, put off by the group’s major shareholder, Dunedin Private Equity, selling £17 million of shares on admission. The majority of the £23.5 million of new money raised also went on paying off mezzanine debts to these backers. Nevertheless Dunedin retains a sizeable ten per cent stake.

The remaining money, which amounted to £6.3 million after flotation costs, is earmarked to help fund further growth of a business that has high hopes of leading the consolidation of this fragmented but fast-growing space.

Davenham fills a gap traditionally occupied by branch bank managers but now vacated by the major clearers. The group has experienced strong growth in the past two years, doubling turnover to £28.5 million for the year to June. This has been achieved despite the loan portfolio only rising by 62 per cent to £151 million during the period.

Profits, before tax and interest from mezzanine debt (since repaid following the float), rose by a similar amount to £9.3 million.

Davenham will lend up to £3 million to companies with annual sales of £30 million. This is done through three divisions: property, trade and asset finance. The first of these divisions is the largest at present, where it specialises in providing bridging loans to developers. The group shortly hopes to launch a commercial mortgage product.

One of the strengths of the group is that it is not reliant on any one customer or business area. It has over 2,400 clients across many sectors. Small housebuilders, importers and distributors are typical customers. The group’s loans charge an effective APR of 18 per cent. But bad debts are only 1.5 per cent of loans, thanks to prudent underwriting policies. The group will not loan on leisure assets or food and fashion goods.

Considering Davenham’s activities are at present funded through a £175 million facility from a syndicate of banks led by the Royal Bank of Scotland, on which it pays 1.5 per cent above base rates (about six per cent), the returns it makes are in the high teens. The group is already in discussions about extending this to £250 million under more efficient terms.

Davenham is based in the north-west with headquarters in Manchester but has plans to move into other regions, in particular the lucrative South-East. Chief executive David Coates aims to make one acquisition in the coming year ‘of up to £10 million’. This would expand the loan book by £30 million.

Coates has a solid background, with experience at Royal Bank of Scotland, Standard Chartered and credit agency Experian, and is ambitious to grow the group further. 29 institutions supported the float, possibly drawn by Davenham’s promise to pay a five per cent dividend this year. 45 per cent of earnings will be distributed in this way.

So far house broker Panmure Gordon has not written research on the company. However, Shore Capital has forecast earnings will rise 18.3 per cent this year to £11 million. This gives 30p of earnings per share and puts the stock on a conservative p/e of 12.2.

Even after a great run on the price to a high of 365.5p, the group’s published dividend policy indicates a still generous yield for 2007. Buy.

Davenham	AIM	£2.74m	10.50p	0.00p
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