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Analyst Q&A with Mark Thomas at Hardman & Co: Non-Standard Finance (LON:NSF)

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: What were your key takeaways from Non-Standard Finance’s recent results?

A1: NSF has reached the turning point in its strategic development. Having invested heavily in infrastructure, controls and people, it has substantially built the franchise. The pace of further investment is expected to now slow, at the same time as payback from historical investment becomes increasingly visible. We see profit growth accelerating sharply, driven by wider jaws between revenue and costs in the branch business and guarantor loans, efficiency improvements in home collect, and improving credit. Assuming NSF is successful in securing additional lower-cost funding, we expect funding costs to relatively reduce, and the funding mix to improve. Our strong growth forecasts are unchanged.

Q2: Could you give us some more numbers of what they delivered in the first half?

A2: Normalised revenue was up 12% to £88m, with the total net loan book up 26% to £336m. Impairments rose 8% to £22m (including what we believe will be a temporary spike in impairments at the guarantor loans business). Costs rose 6% to £47m. With costs and impairments rising significantly more slowly than revenue, normalised operating profit was up 28% to £19.5m. Normalised PBT was up 12% to £6.3m, as finance costs rose 38% (driven primarily by loan book growth of 26% and a greater proportion of debt funding).

Q3: What did they say about the outlook, and how achievable do you think it is?

A3: Management says current full-year trading is in line with market expectations, which implies a sharp acceleration of profit growth in 2H’19. We detailed in our note why such an acceleration is credible but, in summary, there are multiple levers at NSF’s disposal. In Everyday Loans, the branch business, it’s about maturing branches delivering greater profitability, without the drag from incremental investment in new branches. ELD typically opens its branches in the first half, with most of the fitting-out and training expenses in that period but revenue only starting in the second half. In Guarantor loans, it’s about payback from historical investment, market growth and a normalisation of credit. The latter spiked in the first half with the operational difficulties when they consolidated two collection teams into one, and we assume that this will be sorted and that the annual charge will be 21.8% – towards the top of management’s target range of 20%-22%. In Home Collect, it’s about continued good credit and operational efficiency improvements delivering profit growth, even while the business volumes remain weak.

Q4: I saw there was a large exceptional charge – what can you say about that?

A4: There was a £25m exceptional charge, roughly half of which was known about and reflected the costs in the aborted bid for Provident Financial. The other half was not expected and was a write-down on the goodwill it paid for the Home Collect business. The accounting is rather complex but, among other tests, means that if there is substantial fall in the ratings of quoted peers (as has been seen), the value of the acquisition in the books needs to be reviewed. Even though the business reported strong profit growth on prior periods, it meant that the accounting value had to be written down. Looking forward, we believe NSF is now about operational delivery, not further acquisitions.

Q5: I see Woodford Investment Management was a major shareholder, with a 24% stake. What can you tell us about that?

A5: The Woodford stake was sold down from 24% to just under 5% on the 3rd September.  A single buyer Alchemy Special Opportunities took the 19.25% holding. The nature of this investor means it can be a long-term holder looking for capital appreciation. We believe the share overhang has been substantially eliminated.  This is a clear positive for Non-Standard Finance.

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Disclaimer: Statements in this article should not be considered investment advice, which is best sought directly from a qualified professional.