Non-Standard Finance Back to basics

While there has been deafening noise around the lapsed Provident Financial (PFG) bid, the fundamental outlook for NSF is unchanged. It still has the market-leading network in unsecured branch-based lending and is number two in guarantor loans, both growing strongly. It is number three in home credit. The direct costs of the bid were ca.5% of NSF’s market capitalisation and we estimate a further disruption/ extra finance effect of 2%-3%. This may be compared with a share price fall of 28%. Delivery of consensus earnings and franchise growth expectations will be the key to restoring management credibility and reducing the discount to the peer group.

  • Strategy: With the lapsing of the PFG bid, NSF is expected to focus on the operational delivery of the franchise growth in both Everyday Loans (ELD) and Guarantor Loans (GLD) divisions. In home collect (HCC), we expect profit growth to come from improving impairments and operational efficiency.
  • Post-deal effects: We see minimal disruption to ELD or GLD. Earnings delivery and dividend payments may restore the share price rating. NSF may itself become a bid target until such time. The Woodford holding is unclear, but NSF doesn’t seem a priority sale. Multiple directors have been buying recently.
  • Valuation: We roll forward our valuation base year to 2020. The strong profit growth forecasts see a material uplift in valuation with this change. Our approaches now indicate a 96p to 109p range. The highest valuation is from the dividend discount model; we detail below NSF’s actions on its dividend.
  • Risks: Credit risk remains the biggest threat to profitability. NSF’s model accepts higher credit risk where a higher yield justifies it. NSF is innovative, and may incur losses piloting new products, customers and distribution. Regulation is a market issue; management is acting to mitigate this risk.
  • Investment summary: Substantial value should be created, as: i) competitors have withdrawn; ii) NSF is well capitalised, with committed debt funding; iii) macro drivers are positive; and iv) NSF’s experienced management delivers operational efficiency without compromising the key face-to-face model. Targets of 20% loan book growth and 20% EBIT RoA appear credible, and investors are paying ca.7.3x 2019E P/E and getting a ca.7.7% yield.

DOWNLOAD THE FULL REPORT

Click to view all articles for the EPIC:
Or click to view the full company profile:
    Facebook
    Twitter
    LinkedIn
    Hardman & Co

    More articles like this

    Hardman & Co

    Non-Standard Finance: 1H’20 results

    Non-Standard Finance plc (LON:NSF) 1H’20 results reflected the pain from COVID-19, with i) less volume, ii) changes to business models, and iii) higher impairment, including an increased weighting of a severe macro downside, increasing IFRS9 cyclical

    Hardman & Co

    Non-Standard Finance Sunshine after the rain

    Non-Standard Finance plc (LON: NSF) is the topic of conversation when Mark Thomas, Analyst at Hardman & Co joins DirectorsTalk. Mark explains why he called his recent report ‘Sunshine after the rain’, why he thinks NSF is

    Hardman & Co

    Non-Standard Finance Sunshine after the rain

    “The focus for the next few years is on relatively modest investment and on driving return on assets towards our medium-term target of 20% for each division”. So said Non-Standard Finance (LON:NSF) John van Kuffeler at