1H’18 preview: costs 1H-weighted, revenue 2H

We preview the 1H’18 results due in early August. The 18 June trading update confirmed trading was consistent with FY guidance, but we think investors should recognise the split between 1H and 2H. We forecast that NSF will deliver 46% of FY’18 revenue in 1H’18 and 46% of impairments, but 50% of costs and 49% of finance costs; thus, we estimate 18% of group 2018 PBT in 1H’18 and 82% in 2H’18. The revenue split reflects business seasonality and payback for investment. Impairments reflect IFRS9 taking more provisions upfront when loans are added. Costs reflect the timing of investments in each division, operational normalisation in EL, and guarantor loans synergies. We make no changes to 2018 estimates.

• FY guidance unchanged: We note that the trading statement on 18 June and the 14 May AGM reiterated comfort with FY’18 consensus. Management should have good visibility on the FY, given pipelines and year-to-date actuals.
• 1H’18E below 2H’18E: With 1H’18 forecast to show below half of FY’18 revenue but around half of costs and financing, the balance of profits is more 2H-skewed. As we explain in this note, investors should not be concerned about this and, on the back of the recent trading statement, we do not expect consensus 2019 estimates to change. Our 2019E £24.8m PBT is 5% above 2H’18E annualised.
• Valuation: Our absolute valuation measures for NSF range from 100p-103p per share. Until consensus adopts a uniform IFRS9 approach across all companies, peer comparisons have limited value.
• Risks: For all lenders, credit risk is key. For the past decade, EL has shown strong growth and controlled impairments. NSF is innovative and may incur losses in piloting products, but these risks are kept proportionate. Regulation is an issue in home credit; management is taking appropriate action to mitigate this risk.
• Investment summary: Substantial value should be created, as i) competitors have withdrawn, ii) NSF is well capitalised, with committed six-year debt funding, iii) macro drivers are positive, and iv) NSF has a highly experienced management team, delivering operational efficiency without compromising the key F2F model. Targets of 20% loan book growth and 20% EBIT RoA appear credible, and investors are paying 9.8x 2019E P/E and getting a 5.0 yield.