Branching Out Investment accelerated

NSF is accelerating the investment in its branch network, doubling the rate of new office openings 2017/2018 compared with previous expectations. We believe the company’s plans to staff these offices by experienced managers are credible. In home collect (HCC) NSF now has a model to fully exploit the opportunity from the market leader’s re-focus. 19% of Trusttwo new loans in December were from intra-group referrals, up from zero in June. Our estimates have been cut to reflect investment and a more measured risk appetite in HCC through 2018. We believe there is significant opportunity from switching PFG agents and will review forecasts once the scale of the transfers is clearer.

• Strategy: We outlined in our note Carpe Diem, the profitability generated by NSF’s strategy of growing its lending rapidly, widening spreads, gaining efficiencies of scale and having these positive profitability factors only partially offset by higher impairments.
• 2016 results: 2016 pre-tax results were slightly ahead of our numbers and broadly in line with consensus. Tightened lending criteria in H2 saw slower than expected loan growth in HCC but the revenue impact was offset by lower impairments. The H2 cost performance in the branch network was excellent.
• Valuation: The benefit of rolling forward our methodologies to our 2018 numbers is offset by our estimate reductions (now 97p was 101p). Given the expected growth profile moving to 2019 should see a material uplift. As the 2018 dividend is closer to peers we have also introduced a yield comparative.
• Risks: Credit risk remains the biggest issue and part of NSF’s model is to accept higher credit risk where a higher yield justifies it. NSF is also innovative and has incurred losses trialling different routes to customers. Regulation is also a potential issue noting management take appropriate action to mitigate this risk.
• Investment summary: Substantial value should be created as: (i) competitors have withdrawn; (ii) NSF is well-capitalised with access to significant debt funding; (iii) positive macro-economic drivers, and (iv) NSF has an experienced management team delivering technological efficiency without compromising the key F2F model. Targets of 20% loan book growth and 20% EBIT ROA appear credible and investors are paying just 8x 2018 PE and getting a 5%+ yield.