Everyday Loans: a heart of gold

The 14 May trading statement confirmed that all the 2017 trends have continued, leaving our strong growth forecasts unchanged. Rapid loan growth has been seen in each division, impairment continues to be in line with previous guidance (i.e. tightly controlled), and investment continues. In this note, we review the heart of the group, Everyday Loans (80% of 2017 normalised operating profits, 60% of net loan book and 50% of revenue). We believe it has strong competitive advantages in sales, costs and credit, and it has multiple levers to deliver sustainable earnings through an economic downturn. NSF’s 2019E P/E of 9.6x is an anomaly with its growth and profitability outlook.

• Trading update: NSF’s AGM trading update advised trading is in line with management expectations. Strong growth has been seen in each division (inc. being on target for 20% in home collect). Credit remains tightly controlled.
• Everyday Loans (EL): In this note, we show how the product range and market positioning should increase sales sharply. We review the multiple economies of scale, from having a large branch network. We detail how this network improves credit assessment and collections. We also discuss how repricing and volume growth should offset rising impairments in a downturn.
• Valuation: Our absolute valuation measures for NSF group range from 100-103p per share. Until consensus adopts a uniform IFRS9 approach across companies, peer comparisons have limited value.
• Risks: For all lenders, credit risk is key noting EL has delivered strong growth, while controlling impairment. NSF is innovative and may incur losses in piloting products but these risks are kept proportionate. Regulation is an issue in home credit, and 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• Investment summary: Substantial value should be created, as i) competitors have withdrawn, ii) NSF is well capitalised, with access to committed debt funding, (iii) macroeconomic drivers are positive, and iv) NSF has an experienced management team,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 9.6x 2019E P/E and getting a 4.7% yield.

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