Boom times for world's second-oldest profession

It was once a frightening new arrival to the news pages, but with each passing week the credit crisis seems more mundane. It's been some months since we all sat down at the kitchen table to weigh up mortgage payments, school fees and holiday plans, and those of us who haven't retreated to the bunker have already been cutting back in preparation for tougher times. As David Roche put it in the FT, "it's a Wal-Mart world we live in now".

But just as many of us are adjusting to shopping in discount stores, other businesses that used to carry a social stigma are enjoying a renaissance. Take pawnbroking, for example the second-oldest profession in the world. Pawnshops don't exactly have a pristine reputation for customer care. But the old stereotype of a back-alley business that preys on the desperate needs a revamp.

For a start, pawnbroking chains have hit the high street, with more than 800 stores around the country, up from around a hundred in the 1980s. And over the last few months it hasn't been only those with poor credit who have been crossing their thresholds. Every week, around the country, brokers are seeing builders pawning Rolexes to pay their labourers, bankers pawning rings to cover mortgage repayments and even property magnates and wealthy wives handing over gold jewellery and art worth up to £30,000. The National Pawnbrokers Association estimates that business was up 30% in the first six months of this year.

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Why don't these people just go to the bank? After all, some pawnbroking deals can cost borrowers the equivalent of at least 70% in annual interest payments. Who wants to pay that kind of money? Well, it's about getting cash quickly, with few questions asked and without having to upset your bank manager. You go to the pawnbroker with a Rolex, and he will lend you a sum worth about half of its estimated value, charging 7%-8% interest a month. You don't actually pay anything until the term of the loan expires typically a maximum of six months just when you turn up to redeem your watch. So a £1,000 loan on your Rolex over six months ends up costing you £1,480. If you don't make the payment which happens about 10% of the time the pawnbroker can sell your watch on. Loans can vary from as little as £5 to as much as one million pounds, notes Nick McDermott in the Daily Mail, but the average loan from a British pawnbroker is £120 over a period of three and a half months.

As well as a need for cash, pawnbrokers are a good play on gold. The price of the yellow metal might have fallen since the start of this year, but it's still a lot higher than a few years ago something that's seen those desperate for cash raiding their jewellery boxes. A full 97% of pledges at Britain's pawnbrokers are made in gold and diamonds. Britain's largest pawnbroker, H&T Group, produced gross profits of £2.4m on sales of scrap, from £700,000 last year, and there's plenty more jewellery where that came from. With small businesses also looking for quick loans to stay afloat, the future looks bright for this industry at least. Better still, the big pawnbroking chains are cheap. "The industry is not properly understood," says David Blackwell in the FT, "otherwise its strong defensive qualities and growth prospects would be reflected in its price."

The best bet in the sector

With 95 shops nationwide, H&T Group (HAT)is Britain's largest pawnbroker. The group has expanded rapidly in recent years it had 54 stores when it listed in 2004 moving onto the high street and into shopping malls. But it's the price of gold that has been its biggest boon recently. With its pledge book increasing 14% in the first half of this year, the company was able to record a 79% jump in half-year profits to £4.6m. The firm's sales of second-hand jewellery have also been strong, seeing a 14% lift in like-for-like sales in the first half. "Momentum is firmly with the group," says Oliver Hall in the Growth Company Investor.

But despite H&T's recent impressive performance, the stock still languishes near its float price of 172p. Yet this is a very consistent business looking back over five or ten years, growth has virtually been in a straight line. Chief executive John Nichols was very cautious in his assessment of recent performance, stressing that H&T can't continue to buy up smaller brokers at the pace it has been the price of gold in particular has been so strong that owners have developed very expensive expectations of what their store is worth. But even so, the forward p/e of just 8.8 is a very low valuation for such a low-risk business, reckons David Blackwell in the FT.