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• Investment summary: Substantial value should be created, as: i) competitors have withdrawn; ii) NSF is well capitalised, with committed debt funding; iii) macro drivers are positive; and iv) NSF’s experienced management delivers operational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.