# Non-Standard Finance Back to basics

- Link: https://www.directorstalkinterviews.com/non-standard-finance-back-to-basics/412785892
- Published: 2019-06-24T07:57:35+01:00
- Author: Giles Arbor

While there has been deafening noise around the lapsed Provident Financial (PFG)
bid, the fundamental outlook for **Non-Standard Finance** (LON: NSF) is unchanged.
It still has the market-leading network in unsecured branch-based lending and is
number two in guarantor loans, both growing strongly. It is number three in home
credit. The direct costs of the bid were ca.5% of NSF’s market capitalisation and
we estimate a further disruption/ extra finance effect of 2%-3%. This may be compared
with a share price fall of 28%. Delivery of consensus earnings and franchise growth
expectations will be the key to restoring management credibility and reducing the
discount to the peer group.

 * **Strategy:** With the lapsing of the PFG bid, NSF is expected to focus on the
   operational delivery of the franchise growth in both Everyday Loans (ELD) and
   Guarantor Loans (GLD) divisions. In home collect (HCC), we expect profit growth
   to come from improving impairments and operational efficiency.
 * **Post-deal effects:** We see minimal disruption to ELD or GLD. Earnings delivery
   and dividend payments may restore the share price rating. NSF may itself become
   a bid target until such time. The Woodford holding is unclear, but NSF doesn’t
   seem a priority sale. Multiple directors have been buying recently.
 * **Valuation:** We roll forward our valuation base year to 2020. The strong profit
   growth forecasts see a material uplift in valuation with this change. Our approaches
   now indicate a 96p to 109p range. The highest valuation is from the dividend 
   discount model; we detail below NSF’s actions on its dividend.
 * **Risks:** 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.
 * **Investment summary:** Substantial value should be created, as: i) competitors
   have withdrawn; ii) Non-Standard Fiance is well capitalised, with committed debt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.
   Targets of 20% loan book growth and 20% EBIT RoA appear credible, and investors
   are paying ca.7.3x 2019E P/E and getting a ca.7.7% yield.

[DOWNLOAD THE FULL REPORT](https://www.hardmanandco.com/wp-content/uploads/2019/06/NSF-Back-to-basics-17.06.19.pdf)

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