1H’18 results: jam today, more tomorrow

NSF invested heavily in 2016 to 1H’18, deferring the delivery of greater bottom-line profits. The 1H’18 results delivered tangible payback on this investment, with normalised operating profits up 79% (statutory operating profit moved from a loss of £1.1m to a profit of £7.0m). Pre-tax profits were held back by the group locking in long-term, more expensive, funding (finance costs £9.6m vs. £3.1m) but, as these funds are deployed, pre-tax profits are expected to rise. We reviewed Everyday Loans (EL) in "A heart of gold". We believe the re-pricing and volume opportunities that NSF have in a downturn provide it with counter-cyclicality.

• 1H’18 results: The key takeaway from the results was that credit quality was ahead of expectations, especially in the branch and guarantor loan (GLD) businesses. Customer numbers and volumes for those divisions were ahead of our forecasts; Home Collect (HC) agent and customer numbers were a little below our expectations but HC remains the group’s smallest division.
• Outlook: In recent trading statements, management has confirmed that full- year trading is in line with expectations. Despite credit being better than expected, we understand management plans to maintain scorecards, rather than chase incremental volume; indeed, we see an easing in HC volume targets after a period of rapid YoY growth.
• Valuation: Our absolute valuation measures for NSF range from 91p-103p per share. With the IPO of Amigo, there is now a market comparator for the GLD business, and so we are introducing a sum-of-the-parts model (implied valuation 89p). Peer comparators reach up to 91p.
• Risks: Credit risk remains the biggest threat to profitability, and 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 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• Investment summary: Substantial value should be created, as i) competitors have withdrawn, ii) NSF is well capitalised, with committed six-year debt funding, iii) macro drivers are positive, and iv) NSF has a highly experienced management team,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.