Loan growth, better impairments, more investment

NSF’s Capital Markets day provided investors with a lot of detailed information on the business and highlighted three key themes. The detail is available from the presentation NSF Capital Markets Day. In this note we explore in more detail the key themes of (i) loan growth ahead of expectations (ii) improving asset quality and (iii) further accelerated investment. The net effect is a reduction to 2017/18 estimates, driven by investment, although we expect consensus 2019 to rise. The accelerated investment shows management confidence in the macro-environment (low incomes growing ahead of inflation) and its business model.

• Loan growth: The pro forma group loan book growth of 34% end October y-o-y is well ahead of that reported in H117 (+17%) with the stars being branch-based lending up 20% to £144m (H117 +16%), and home collect up 40% (to £38m). Guarantor loans grew 33% despite the disruption from a major integration.
• Improving asset quality across the group: Twelve month rolling impairments to end October as a percentage of revenue were 17.9% in branch-based lending (H117 19.6%), 32.9% in home collect (H117 37.5%) and 14.6% in guarantor loans (H117 15.3%). Critically, every cohort of lending is improving.
• Accelerated investment: In branch-based lending 12 new centres are now expected to be opened in 2018 mainly in Q1 (this is up from 7 in our previous forecasts). Home collect in 2017 will see £3m in temporary agent commissions and £2m in additional infrastructure costs supporting the significant growth in its agent franchise taking advantage of the restructuring at Provident Financial.
• Valuation: We reviewed a range of valuation metrics (and sensitivity to assumptions) in our initiation “Carpe Diem” and more recent notes. With the forecast changes these now indicate a range of 91 – 100p p/sh on absolute measures. Peer ratings are broadly similar to NSF.
• Investment summary: Substantial value should be created as: (i) competitors have withdrawn; (ii) NSF is well-capitalised with access to significant debt funding; (iii) positive macro-economic drivers, and (iv) NSF has an experienced management team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 10.6x 2018 PE and getting a 4.7% yield.