Buy-to-let lender that deserves more credit

published 31 October 2005

It must be "infuriating" for Paragon, says Stephen Foley in The Independent. The buy-to-let mortgage lender that caters for professional landlords regularly delivers profits ahead of expectations and healthy dividends on the back of strong lending growth. At the same time its bad debt record is better than the wider lending market. Yet the City lumps it in with "the loan sharks and other groups swimming in the wilder seas of the credit world". Some of these fears are understandable. There are risks in the housing market, not least from the hike in interest rates and the likelihood that they will rise further. At the same time, house price growth is set to ease. But for Paragon this is much less of a problem than for other lenders. It certainly is, says Rosie Murray-West in The Daily Telegraph. In an environment of economic uncertainty, consumers delay purchases and in this context that means a number of first-time buyers choose to rent instead. Interest-rate rises should cool activity in the housing market, and privately rented accommodation will be the main beneficiary - social housing is already stretched to capacity.

Paragon also recently acquired Britannic Money for £18.8m, which will enhance its prospects. It doubles the size of its loan book to £5.3bn, while broadening its reach in the buy-to-let market (which now accounts for 75% of its business and 60% of its assets). It also contributes to a bulging pipeline of new loans - orders are set to increase from £270m to £600m.

Excluding the effects of the acquisition, pre-tax profits were up 15.4% to £53.1m and the dividend is set to increase by 25% to about 7.9p, giving a yield of 2.5%. And while the stock has almost doubled from a low of 161.5p a year ago, with a predicted price/earnings ratio of 7.5 times for next year, it is still looking cheap. Buy