FY’19 solid; outlook – broad range of outcomes

Key takeaways from NSF’s results and presentation were: i) solid underlying 2019 with normalised operating profits up 20% and lower impairments to revenue; ii) £60m cash now ‒ April and May cash-generative; and iii) current collections 86% of pre-lockdown levels. NSF is a going concern and is considering an equity raise to help fund additional growth. Downside includes: i) statutory loss with further goodwill impairments; ii) material uncertainty arising from COVID-19 effects and so possibly its going-concern status; and iii) operating performance improvement needed for further securitisation-line drawings (waiver extended on 29 June).

• Opportunities: We have emphasised before how higher demand for non-standard lending in a downturn, combined with wider spreads, can more than offset increased impairments. NSF’s current balance sheet means that an equity raise to support credit lines is necessary to take advantage of this opportunity.
• Uncertainties: COVID-19 creates uncertainty on loan volumes (and so income) as well as impairment. NSF is solvent and liquid in its base-case scenario, and so the business is a “going concern”. However, a materially more severe downturn could see further financing covenants breached and a risk to this status.
• Valuation: Near-term earnings, and dividend progression, do not reflect the long-term business outlook and are likely to be highly variable. The Gordon Growth Model implies for a long-term profitable growing business, a value above book (2019 tangible book value £40m, market capitalisation £16m).
• Risks: Credit risk remains the biggest threat to profitability (this is mitigated through high risk-adjusted margins and good customer relationships), and NSF’s model accepts higher credit risk where a higher yield justifies it. As noted above, COVID-19 also presents short-term threats to income.
• Investment summary: Short-term uncertainty aside, substantial medium- and long-term value should be created, as i) demand for, and pricing of, non-standard finance is likely to be strong for at least the next few years following the fallout from the COVID-19 crisis, ii) NSF has substantial committed medium-term debt funding, iii) competitors have withdrawn (and potentially more may do so), and iv) it has a highly experienced management team.