Non-Standard Finance PLC (LON:NSF) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: You released a note the other day entitled ‘Reading the Runes’, can you tell us what that was about?
A1: In early December, Non-Standard Finance held an investor day at their Reading branch of Everyday Loans, which is one of their subsidiaries, and also at the head office of Everyday Loans in Bourne End.
Investors and analysts got the opportunity to see the front-line operations and review the company’s strategy. The former confirmed our view on the competitive advantages of having a branch network and the operational synergies of being part of a group. The presentation on strategy confirmed the long-term, controlled growth opportunity from the business with an excellent market positioning and sustainable competitive advantages.
Q2: So, what did you learn in the group’s strategy section?
A2: Well, the key message from the investor visit is about continued long-term controlled growth in Everyday Loans, as I say a business that’s got excellent, sustainable market positioning.
In particular, what came out from this visit is that for the foreseeable future, the company can use technology to deliver an enhanced customer experience and deliver operational efficiencies. The opportunities from the latter are designed to enhance the face-to-face business model, they’re not going to replace it.
The second is that it can generate more leads by number but also convert more leads with deeper and broader broker relationships, expanding marketing and improving conversion rates.
Thirdly, it can expand its branch network with a long-term potential optimal size of the network now being viewed as 100-120 branches, broadly double the current network, and up from a previous target of 75-100 branches. Each branch at the minute delivers something around 600,000 of profit with a target to take that to 1 million so the increase in branches alone is a material growth opportunity.
Q3: So that sounds like Everyday Loans had a lot of levers to generate growth?
A3: It does, we highlighted in our note ‘Everyday Loans: A heart of Gold’ that was published in May how we saw this structural competitive advantages in credit and in its branch distribution. These are really important supplements to the levers to operate growth.
As I say, with this meeting, the highlight really was the growth opportunity, more branches, more people, better processing, stronger lead generation, all delivering medium term profits in many multiples of the current level.
Q4: So, what did you gain from visiting the branch?
A4: For me, the key thing was it reinforce the structural advantages we highlighted in our May note. In particular, the branch manager outlined how they get their really deep knowledge of their customer, the customer’s personality and also going through which documents you can look at in detail and discuss with the customer in advance that you simply can’t do online. The level of engagement with the customer was more than we’d expected, building relationships which over time become critical collecting money when things go bad as well.
What we also learned was that the group synergies which are being claimed by group management actually are working through to the front line and the branches, especially when it comes to adopting best practice.
All in all, it was a very comforting confirmation of the advantages we believed to be there before.
Q5: With Brexit in the news constantly, it’d be rude not to mention it. Are there any vulnerabilities and if there are, how will Non-Standard Finance be affected?
A5: A well-managed, non-standard, personal lender historically have performed very robustly in downturns so if there was a Brexit-related downturn we would be looking for NSF to do just that. Credit losses indisputably rise but there are increasing numbers of customers that need non-standard finance, so the volume and the demand goes up and with that, pricing also goes.
So, what you have is the balance between higher credit losses but more volume and better pricing and what’s critical to that dynamic is being close to your customer and understanding how they react as things become more difficult. It’s also important to ensure that you have your own funding committed and NSF has done that.
So, overall, NSF’s businesses look well positioned both in absolute terms but also significantly better than most of its competitors, especially those who are online.