Britannia Finance as a CRACKING long term buy @ 41p.

full report at www.unquoted-analyst.com

Part of the t1ps stable of newsletters.

Interview done late last year with the Third eye website:

Congratulations to Mark Burgess & his team at Britannia on superb interim results. Also huge thanks for taking time to answer the following questions.


1. Cost of Sales appeared to rise out of kilter with other figures why?


The increase in the cost of sales was due to increased commissions paid to our introducers in line with increased advance levels, and Account Manager salaries which were transferred from Admin Expenses to Cost of Sales during the period.




2. Does Britannia envisage paying a dividend in the near future?


The company will not pay a dividend during this financial year however we will review this again during 05/06.




3. Why has turnover growth slowed down in the last period, compared to the previous six months?


The business mix changed during the period. Deals which are placed with outside lenders create an immediate commission income. Interest income is earned from deals written in-house over the period of the loan typically three years. A higher proportion of deals were written in-house during the 6 month period to 31 October creating a lower commission income but an increased interest income which will feed through to revenue over the lifetime of the loan.




4. What is the comparative size of the major (motor) dealer market versus the smaller dealer market?


The point of sale motor finance market is in excess of 11 billion per annum. To my knowledge data does not exist regarding the exact size of the major motor dealer market versus the smaller dealer market. Britannia has traditionally concentrated on servicing the needs of the smaller motor dealer. Recently we have started to target the larger dealer groups with the ability of producing much larger volumes of business.



5. Who are BFH competing against in this market and how do BFH propose to beat them?


We are continually seeking to fulfil niche areas which are not fully serviced by the major players. Britannia seeks low risk customers, but wins business by offering flexibility with regard to the type / age of vehicle financed. The major players operate a point score system in order to assess credit risk. The advantage to a computerised point score system is that it allows the main players to be able to process simple loans, at fine rates in bulk quickly. The underwriting team at Britannia assesses credit risk manually. The underwriters analyse the intent and ability of the customer to service the agreement. We aim to accept the deals in-house which fall outside the computerised point score formula by using a more detailed, manual approach.




6. Will new government legislation re: credit affect BFH in any way?


The objective of the new legislation is to protect the consumer and encourage responsible lending. New laws include making the terms and conditions of the agreement clearer, harmonising interest rate calculations, providing information regarding settlement figures at various points of time in the future and amending settlement rebate calculations. There are also a number of new laws which will aim to crack down on illegal lenders acting without a Consumer Credit Licence.


At Britannia we welcome the new laws. Britannia is already a very responsible lender. Being a responsible lender means that credit is offered to only those who we believe can afford to meet the repayments and that the agreement terms are explained clearly to the customer. Firstly we conduct an income test on every single deal to ensure that the customer is in a position to meet the repayments. Secondly not only do we provide the customer with a copy of the agreement at the point of sale and a copy through the post we also telephone each customer prior to taking out the loan to explain the financial details and confirm the customer is happy to proceed. We are of the opinion that it makes commercial sense to make 100% sure that the customer understands the financial commitment fully and that the customer has both the intent and ability to repay.




7. Ofex is set to change dramatically with up to 5 market makers expected by 2004 end, will this affect any market plans (ie a move to AIM) you may have?


We welcome the introduction of competing market makers and hope that the result is increased liquidity, and more institutional support for Ofex companies. We intend to monitor the effect of the introduction of new market makers and will consider the available options after publication of the full year results.




8. What is yopur response to criticism that BFHs rates are too high @ circa 30% Apr?


Britannia do charge a premium rate however the value to the customer is that they are able to purchase their own choice of vehicle. Many of the major lenders offer lower rates but will not finance certain vehicles (EG older vehicles, imported vehicles) At Britannia we take a careful look at the type of vehicle. By manually assessing the customer / vehicle we are able to use a common sense approach without automatically excluding certain types, ages of vehicle. In return our customers accept a premium interest rate charge.




9. Do you have any plans to enter different markets?


Our core business is motor finance and the market offers such room for growth that it is not necessary for Britannia to enter different markets. However we do plan to offer additional products to our existing good paid customers. At present we are piloting a scheme whereby we market existing customers for further car finance. However I feel we could do much more with our existing customer base. In the future we may offer our existing customers a wide range of other products including a personal or secured loan.




10. The Motor finance industry has hit difficult times recently is this still the case?


In my view the motor finance industry is currently buoyant. There has been some consolidation within the industry over the last few years which has resulted in lower levels of competition today than two years ago.




11. Will you change your accounting policy in the future to fit in with your peers and if so what sort of difference will it make?


We consider our accounting policies to be conservative and intend to maintain our existing policies. However we will continue to be led by the advice that our auditors provide in this regard.




12. Can the growth be maintained?


Yes I believe that the current growth rates can be accelerated in future periods.
The companys main focus is growth in profitability. It is easy to lend within the motor finance market but more difficult to lend profitably. We must maintain our two key principles of lending to quality customers and charging premium interest rates.


We are in the process of investing in a state of the art, internet based computer system. The system will allow for double the current business volumes without a single extra member of operational staff, although further sales and marketing staff will be required. The system will also allow for the faster processing of applications, increased motor dealer satisfaction due to improved information flow, better management information and ultimately a completely paperless environment.


Our greatest strength is our people and with great people we believe literally anything is possible.