Reading the runes: strong, controlled growth

On 3 December, NSF held an investor day at the Reading branch of Everyday Loans (EL) and its head office in Bourne End. Investors and analysts thus got the opportunity to see the front-line operations and review the company’s strategy. The former confirmed our view on the competitive advantages of a branch network and the operational synergies from being part of a group. The presentation confirmed the long-term, controlled growth opportunity from a business with an excellent market positioning and sustainable competitive advantages. We have not changed our forecasts following the update, and our absolute valuation range remains 91-101p.

• Strategic outlook: NSF highlighted the levers it has to deliver sustainable growth from using technology, expanding the network and upskilling staff to increase lead generation/conversion, while improving efficiency and managing credit. It confirmed our view outlined in our 14 May note, Everyday Loans a heart of gold.
• Branch visit: The branch visit confirmed how, in practice, credit risk is lowered from the customer knowledge and relationships that a face-to-face model brings. We also confirmed that group best practice is not only being adopted across the network, but that it is also viewed as an enhancement to the business, and not an imposition.
• Valuation: Our absolute valuation measures for NSF range from 91p to 101p per share. Our sum-of-the-parts model has an implied valuation of 85p. Peer comparators reach up to 81p. Our assumptions were outlined in our last report, published in August, entitled 1H’18 results.
• 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• Investment summary: Substantial value should be created, as i) competitors have withdrawn, ii) NSF is well capitalised, with committed six-year debt funding, iii) macro drivers are positive, and iv) NSF has a highly experienced management team,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 ca.10x 2019E P/E and getting a ca.5% yield.