Albemarle & Bond is still sparkling

More than any other company, with the exception of gold miners, pawnbroking business Albemarle & Bond (A&B) is raking in the cash due to the near quadrupling of the gold price over the past five years. Pawnbrokers are currently capitalising on ‘gold purchasing’, which some industry watchers believe has revolutionised the industry. Certainly it has revolutionised AIM-traded A&B’s profits, which grew by 75 per cent to £10.8 million pre-tax in the six months to last December.

Much of this increase was due to gold purchasing, which contributed about £2.2 million, or 20 per cent of the profit, despite not being included in the results for the same period a year earlier. But even after a bullish trading statement in May, in which A&B said it was confident that both consumer demand for quick cash and the high price of gold would continue, its share price continues to slide – it has fallen almost 20 per cent since mid-January.

One reason for this could be that the market does not think that A&B’s gold purchasing profits are sustainable. After all, what the company is doing is simply melting down the gold it purchases and selling it on to the wholesale market, thereby taking immediate advantage of the gold price. This has affected its jewellery retailing business, where sales declined by 18 per cent to £4.2 million (2009: £5.1 million) during the last half, since there was less product to sell.

As CEO Barry Stevenson explains, ‘Retailing jewellery is particularly difficult for us, given that it is better for us to scrap the product and take a wholesale margin, rather than a retail margin which is much more risky.’

Independent broker Brewin Dolphin estimates that A&B made 2,400 kg of 9-carat purchases in the year to 30 June and believes that this will fall to 1,800 kg next year. This will be easy money for A&B, so long as the gold price remains at current levels. Whether or not the gold price will hold up is debatable, but what is not is A&B’s long-term record of increasing profits, as Stevenson trumpets: ‘This is our 19th year of consecutive profit growth.’

House broker Collins Stewart forecasts average profit growth of 11 per cent for the next three years. Assisting A&B in hitting these targets will be store openings, which the strong gold price and zero funding issues (A&B has very little debt and a low cost of borrowing) will allow the company to do. Currently, A&B has 126 stores and 25 openings are planned for next year, while Stevenson insists that the group is on track to double store numbers in less than five years’ time.

What will also benefit the company is an end to its disastrous hedging policy, taken out in July 2008 and running until July 2011. Basically, A&B is contracted to sell each 9-carat gram of gold for £4.30 – well below its current price of over £10. This effectively cost the company close to £1 million in the first half and is expected to cost A&B as much in the current half, which equates to 3p per share. Collins Stewart forecasts current-year EPS of 24.7p.

More to the point, A&B’s core business of pawnbroking (50 per cent of profits, if gold purchasing is to be considered a separate division) is growing, as are its lending activities, which represent about 14 per cent of profits. Pawnbroking profits grew 14 per cent in the first half. And in May the company said that the number of loans it had issued this year has increased by 10 per cent, compared with last year.

Trading on a one-year forward price-to-earnings ratio of close to nine times, and offering a forecast dividend yield of almost 5 per cent, A&B’s shares look good value and represent a very decent recession-beating play.