A fortnight ago having spoken to Tony Nelson, the bullish chief executive of leasing company Private & Commercial Finance, I wrote an article called ‘The Golden Age of Lending.’
Another man who is finding today’s conditions quite to his liking is Mike Johnson, who is fast recovering the fortunes of a real AIM minnow with the strange name of 1PM.
Just over two years ago when this business was floated on the stock market Johnson had nothing to do with it. Instead 51% of the shares were in the hands of Tony Williams and John Stickley, who were intent on growing the company through providing asset finance to sub-prime borrowers. Within eighteen months this strategy had gone seriously awry and Johnson, a sixty-three year-old who has already made two attempts to retire, was once again called back into action. Taking over from Williams and Stickley, who both resigned last year, Johnson has changed the business model, abandoning the sub-prime sector and introducing practices that have served him well in his long career in the leasing industry.
With Operations Director Maria Hampton he went through each and every one of the three hundred or so loans made under the previous regime, wrote off £486,000 of the £2.5m loan book and closed all relationships with the brokers that had been providing the sub-prime business leads.
In place of this strategy, which clearly did not work at the time and would have been an absolute disaster in the current economic conditions, Johnson turned 1PM into what he proudly told me is the ‘most boring leasing company you will ever come across.’
New lending criteria have been introduced, taking the profile of the customer from one extreme to the other. Now 1PM, which is run by a small, settled and enthusiastic team, looks for small business owners who have a good business plan, have equity in their homes sufficient to secure a loan, and who are prepared to put at least as much of their own money into the purchase of a business asset as they are asking from 1PM.
The business works
The demand for this service is great.
Not only have some finance providers closed their doors in recent months, but the major banks have only been providing credit at the expense of a working capital facility. The squeeze is on, and 1PM is in a position to take advantage. Crucial within this industry, Johnson told me in his office in Bath, are personal relationships. Having taken over the reigns he re-established links with thirty or so brokers, all known to him in the past.
He knows that they will refer good quality business and they know that Johnson and his team will give a fair response. So now 1PM is writing about £400,000 to £500,000 of new business each month, and although this is offset by around half of this amount of old business running off it still represents a rapid expansion of a loan book which at present totals about £5m.
The loans are small, up to about £25,000 and despite the extra work that is involved in approving a large number of small loans rather than one large one, Johnson is a firm believer in the diversification of risk.
When 1PM made its AIM debut it sold new shares at 2p, valuing the business at just under £3m. In a move that reduced the shareholdings of Williams and Stickley to 17%, £675,000 was raised through a placing at 0.25p last year, half of which was subscribed by the new directors.
Today the share price is 0.33p, valuing 1PM at a mere £1.4m. But it is now profitable.
Last week 1PM announced a pre-tax profit of £80,000, of which £56,000 was recorded in the second half of the year. The loan book is growing, 1PM is making good progress at recovering the money lent into the sub-prime market, and having increased its funding sources from one to four it is able to borrow at about 9% while lending at 18%-20%.
While others are raising lending rates Johnson is keeping 1PM’s stable, and as the ‘old’ book of loans to the sub-prime sector is finally run off overt the next eighteen months he expects to shave a percent off the cost of 1PM’s borrowings.
The business has now been restored to health. Johnson has gone back to basics, introduced a strategy that has served him well in the past and will certainly stick to it. So perhaps the main outstanding questions are the extent to which the looming recession will result in payment defaults, and Johnson’s own plans.
On the former Johnson is realistic, saying that there is sure to be an increase in bad loans. But with only 1% of loan repayments in arrears today, compared with the industry average of 3%, 1PM starts from a strong position.
And as to the latter, Johnson is not planning a fourth attempt at retirement. Instead he is contemplating the possibilities of expansion, possibly through acquiring books of loans from competitors.
In any case Johnson was keen to emphasise the strength of his team, and the consistency of the strategy. ‘We chase profit, not volume,’ he explained.’ The market capitalisation is tiny and the dealing spread is wide. But still this is clearly a company that is on the mend and the share price should follow suit.
Tom Bulford
for The Penny Sleuth
