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 John van Kuffeler at the 16 January 2020 capital markets day. After an eventful 2019, 2020 (and beyond) is now all about operational delivery, the “boring” grinding out of profit from a franchise that has seen heavy investment over many years. We welcome this focus and think it will help deliver the 84% EPS growth (2021 on 2018) in current consensus estimates. The accompanying trading statement indicated 2019 results would be in line with market expectations. The shares rose 15% on the day.

• Trading update: The branch-based lending business’ (ELL) net loan book grew 17% and the guarantor loan division (GLD) book by 29% vs. end-2018. Home Collected Credit (HCC) saw a small fall. Impairments were 22.4% of revenue in ELL, 22.6% in GLD and 27% in HCC. Progress has been made on a cheaper, six-year, securitisation line that is expected to be £150m-£200m in size.
• Capital Markets Day: The presentation focused on the good current trading conditions and how the group will operationally deliver profit growth. NSF emphasised that the franchise build was largely complete and now the focus can be on delivering profit growth. The company’s focus on developing the right culture to underpin long-term success was also underlined.
• Valuation: Our absolute approaches now indicate a range of 79p-85p. At the current price, the 2020 prospective P/E is 4.4x for a business whose impairment provisioning already reflects a significant downside scenario and where earnings could nearly double over three years. The yield is also double-digit.
• Risks: Credit risk is the biggest threat to profitability. NSF’s model accepts more credit risk, where a higher yield justifies it. NSF is innovative, and may incur losses piloting products, distribution and customers. 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• Investment summary: Substantial value should be created, as: i) competitors have withdrawn; ii) NSF is well-funded, with committed debt funding to 2023; iii) macro drivers are positive; and iv) NSF’s experienced management delivers operational efficiency without compromising the key face-to-face model. Management targets of strong loan book growth and 20% EBIT RoA appears credible. Plus, investors are paying 6.6x 2019E P/E and getting a 11.1% yield.