NSF has reached the turning point in its strategic development. Having invested heavily in infrastructure, controls and people, it has substantially built the franchise. The pace of further investment is expected to now slow, at the same time as payback from historical investment becomes increasingly visible. We see profit growth accelerating sharply, driven by wider jaws between revenue and costs in the branch business and guarantor loans, efficiency improvements in home collect, and improving credit. Assuming NSF is successful in securing additional lower-cost funding, we expect funding costs to relatively reduce, and the funding mix to improve. Our strong growth forecasts are unchanged.
Normalised revenue was up 12% to £88.3m (1H’18: £78.9m). Normalised operating profit rose 28% to £19.5m. Normalised PBT increased 12% to £6.3m. Exceptional charges were £25.3m (around half bid fees and half a goodwill write-down). DPS was up 17% to 0.7p.
Management says current trading is in line with market expectations, which implies a sharp acceleration of profit growth in 2H’19. We detail in this note why such an acceleration is credible and the multiple levers at NSF’s disposal. Delivery on these forecasts may re-establish the share rating.
Our valuation approaches now indicate a 92p-109p range (previously 96p-109p). The Discounted Dividend Model, the highest valuation, is unchanged given unchanged estimates. Our Gordon Growth Model has reduced with lower tangible equity. The peer-rating-driven Sum-of-the-Parts is 67p.
Credit risk remains the biggest threat to profitability. 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 acting to mitigate this risk.
Substantial value should be created, as i) competitors have withdrawn, ii) NSF is well capitalised, with committed debt funding, iii) macro drivers are positive, and iv) NSF’s experienced management delivers operational efficiency without compromising the key face-to-face model. Management targets of 20% loan book growth and 20% EBIT RoA appear credible, and investors are paying 6.7x 2019E P/E and getting an 8.4% yield.