S&U - Elevated regulatory impact

S&U’s Q125 trading update disclosed increased pressure as the company steers cautiously through the changing regulatory landscape. The payment rate in the Advantage motor finance business fell to 87.7% from an average 92.1% in FY24, which led to group PBT falling by 34% to £6.9m (Q124: £10.5m) from higher impairments. The negative effects will likely have an impact on future quarters as management expects discussions with the Financial Conduct Authority (FCA) to conclude only in H2 CY24 and lending criteria were tightened at the end of Q1. On the positive side, demand remains strong, with applications at a record high. Moreover, the Aspen bridging business continues to grow rapidly, with Q1 PBT up by 36% y-o-y to a record £1.45m. We have cut our estimates for FY25 EPS by 22% to 179p and FY26 EPS by 15% to 223p for a return on equity (RoE) of 11%.