Smaller Companies: Small lenders find favour

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The Independent Online
FINANCIAL STOCKS - at least the heavyweight blue chip stocks - have been among the star performers of the recent bull market, writes Richard Phillips.

Those seeking their thrills among smaller companies, however, have had their work cut out finding good quality, long-term growth stocks in the sector. Businesses such as mortgage lending, deposit taking and corporate lending are pretty much the sole preserve of the big boys. However there have been successes. Glasgow-based leasing finance business EFT - tipped here at 79p three years ago, and again at 109p in 1996 - was snapped up by the Bank of Scotland in a pounds 89.6m deal for 175p a share last summer.

One company with a low profile but a growing fan club which may merit closer attention is London Scottish Bank (132p).

Chiefly involved in debt collection, consumer credit and reinsurance, the last four years have shown strong growth, reflected in a share price which has risen 120 per cent in the last three years. LBS has also substantially outperformed the market over this time. Indeed, the past four months have seen the shares on a particularly strong run. If pre-tax profit were to reach pounds 10.5m for the current year, it leaves the shares trading on a heady 20 times earnings, descending to a still pricey 18 times 1999 earnings from pre-tax profits of, say, pounds 11.5m.

Some of this has been keeping up with the explosion of demand for the blue chip stocks. But interim figures last June also played their part. Pre-tax profits edged ahead a mere 0.1 per cent to pounds 4.3m. The problem was higher staff costs and a rash of bad debts. However, underneath this, the picture looked far more rosy. Debt collection profits rose 15 per cent to pounds 1.37m, while reinsurance profit was up 50 per cent to pounds 1.17m. A 15 per cent rise in the dividend probably reflected the company's confidence to grow future profits.

Full-year figures just announced saw profits of pounds 9.42m, virtually unchanged. While the shares may be on the expensive side, continuing growth in credit finance, and a strong debt recovery business, should keep the shares on an upward track.