Transformational deal with Team China: lottery meets sports

Hui10, IIG’s largest investment, has inked a landmark agreement for unique rights to promote Team China merchandise through its dedicated lottery shops and HongBao Sports Lottery. According to Sir Nigel Rudd, Chairman of IIG, the partnership demonstrates how Hui10 can connect communities, improve the retail experience and contribute to the growth of national sports. Hui10 is digitising the US$72bn Chinese national lottery, the second largest in the world. We leave estimates unchanged but remind that a successful roll-out sees Hui10 generate c.£1bn EBIT by 2030E. Our view is unchanged: IIG shareholders have a substantial opportunity from the asset-light, cash-generative Hui10 business. We see a significant valuation opportunity, with an intrinsic value of 900p based on DCF (909p), FCF yield (822p) and a peer review (968p) – see our initiation.

Transformational deal with Team China: lottery meets sports

We initiate coverage on Intuitive Investments Group plc (IIG), a closed-end investment fund. IIG’s largest investment is Hui10, which is digitising the US$72bn Chinese national lottery (the second largest in the world). Success would see Hui10 generate c.£1bn EBIT by 2030E from its two divisions: Huishi Dehua has developed the software platform to digitise the lottery, while Lucky World transforms retail for 200k lottery shops and their 100m customers. A TAM of 1.1bn adults ensures a dramatic scale-up opportunity to grow revenue, earnings and cash. IIG shareholders have a substantial opportunity from the asset-light, cash-generative Hui10 business where success is also good for the Chinese state’s official lottery issuers, the Welfare Fund and Sports Developments Fund, and the many state-owned enterprise partners enfranchised into the lottery sector by Hui10.

Everyone’s a winner with Hui10

Secure Trust Bank’s (STB) recent Capital Markets Event provided an interesting insight into its Commercial Finance business and a compelling strategy for continued growth. Accounting for 11% of STB’s loan portfolio, Commercial Finance’s scalable business model has doubled income during the last three years by delivering 65% loan growth and leveraging its low-cost advisory partner network.

Commercial Finance positioned for continued growth

STB’s trading update highlights strong growth in Q3 24 net lending and deposits, with continued confidence in delivering 2024 and 2025 cost savings targets. Timing of recoveries from the excess levels of defaults following the Borrowers in Financial Difficulty (BIFD) review is, however, uncertain and taking longer than previously envisaged. This has led to a significant uplift in our 2024 impairments forecasts, with additional (but lower) increases expected for 2025 and 2026.

Vehicle Finance recovery timing eclipses strong fundamentals

Alongside 2024 interim results (to 30 June), Secure Trust Bank (STB) announced substantial upgrades to its 2025 and 2026 cost reduction targets. We now forecast a 44% cost income ratio in 2026, at the lower end of management’s medium-term target (MTT) range. The upgraded cost reduction target reinforces our confidence in STB achieving its medium-term Return on Equity target of 14%-16%.

Improved cost guidance reinforces medium- term targets

We initiate coverage on Secure Trust Bank (STB), a leading retail deposit-funded specialist bank operating in four core markets with substantial growth opportunities. STB’s ambitious and achievable medium-term targets aim to deliver significantly higher profitability combined with a lower-risk earnings stream. The key to much of this is STB’s grip on technology and the extent to which it has been embedded across all businesses and integrated with its business partners. STB has a 31 December financial year-end, and will announce 2024 interim results on 14 August.

Tech-enabled growth and efficiency drive operational leverage

Anexo Group plc

DF Capital Holdings plc

finnCap Group plc

Oberon Investments Group is a wealth management & planning, private ventures and corporate advisory boutique. A recently acquired majority stake in a fintech/custody business is not yet reflected in the valuation, in our view. Oberon was established in 2018 and listed on the ASE in 2021. Intensive investment in challenging markets has created a differentiated business model, positioned well in a consolidating sector. Investment is driving impressive growth in funds under management & administration, and in revenue, which should convert to strong EBITDA growth in FY25E.

Initiating coverage: A unique proposition

Anexo has announced impressive H1 22 results, with 42% revenue growth and 53% PBT growth underpinned by strong demand in the Credit Hire business and a doubling of revenue and profit in the Housing Disrepair division. Continued investment in the Legal Services division resulted in 20% growth in cash collections. The Board has highlighted that the emissions opportunity warrants significantly increased investment and that shareholders’ interests would be better served by Anexo paying an annual dividend after announcement of FY22 results. Our 1.5p dividend forecast for FY22 is unchanged. Reductions in PBT and EPS for FY22 (-5%) and FY23 (-6%) reflect a lower year-end vehicle count in Credit Hire and higher finance costs, partially offset by revenue upgrades in Housing Disrepair.

A changing business model

Against a background of continued economic uncertainty, DF Capital has today published an encouraging trading update, demonstrating strong growth in new loan origination, loan balances and loan facilities. The company appears on course to achieve our 2022 forecast loan book growth of 80% to £449m. DF Capital will provide a full update in its interim results release scheduled for 20 September.