Orchard Funding – I bought a lot more

I’ve more than tripled my holding in Orchard Funding (LSE:ORCH) at 48p because its net current asset value is 77p and it is financially and operationally stable with a loyal customer base and low-risk business model, as well as having a highly experienced and capable managerial team. It also produces a reliable 3p dividend each year supplying an attractive 6.25% dividend yield.
Given the quality of the customer offering and the potential to tap adjacent markets it is likely that the dividend will grow nicely from here.
Since 2014 annual earnings per share have averaged 6.5p putting the shares on a cyclically adjusted price earnings ratio of 7.4, almost half the market average.
Even in the year ending 31st July 2020, one affected by Covid, earnings per share came out at 5.96p. In the worst year, the one ending 31st July 2021, they were still a creditable 3.91p.  Now they have bounced back, all the way to 7.11p.
The resilience displayed in the Covid slump was the second time the business model was tested by events beyond the firm’s control having sailed through the Global Financial Crisis in good shape.
The business
The company in its modern form was built by former investment banker Ravi Takhar following his acquisition of 100% of the equity in 2002. He now owns 53.66% after the sale of £10m of new shares to other investors when it joined the AIM market in 2015.
The business model is simple: around the country are thousands of insurance brokers whose clients often do not want to pay say a £2,000 annual insurance premium all in one go at the start of the policy.
Orchard Funding, through its Bexhill subsidiary, offers brokers and their clients a deal.  It will pay the premium and, in return the client will make say 10 monthly payments to Bexhill.  The amount paid each month is slightly more than one-tenth of the premium to allow for an effective interest charge.
Typically, Orchard will fund one half of its outstanding loans to customers with its own money and one half will come from an annually arranged loan facility from NatWest or Toyota. It also raised £3.9m this year from a Retail Bond issue this year, paying 6.25%.
Even paying an average of 3.57% on the funding it borrows (which includes bank fees etc.) Orchard can make a good profit because it charges APRs much higher than that.
The insurance broker is happy because the ultimate customer is p....