# Non-Standard Finance Sunshine after the rain

- Link: https://www.directorstalkinterviews.com/non-standard-finance-sunshine-after-the-rain/412803304
- Published: 2020-01-20T08:17:45+00:00
- Author: Amilia Stone

“The focus for the next few years is on relatively modest investment and on driving
return on assets towards our medium-term target of 20% for each division”. So said**
Non-Standard Finance** (LON:NSF) John van Kuffeler at the 16 January 2020 capital
markets day. After an eventful 2019, 2020 (and beyond) is now all about operational
delivery, the “boring” grinding out of profit from a franchise that has seen heavy
investment over many years. We welcome this focus and think it will help deliver
the 84% EPS growth (2021 on 2018) in current consensus estimates. The accompanying
trading statement indicated 2019 results would be in line with market expectations.
The shares rose 15% on the day.

 * **Trading update:** The branch-based lending business’ (ELL) net loan book grew
   17% and the guarantor loan division (GLD) book by 29% vs. end-2018. Home Collected
   Credit (HCC) saw a small fall. Impairments were 22.4% of revenue in ELL, 22.6%
   in GLD and 27% in HCC. Progress has been made on a cheaper, six-year, securitisation
   line that is expected to be £150m-£200m in size.
 * **Capital Markets Day:** The presentation focused on the good current trading
   conditions and how the group will operationally deliver profit growth. NSF emphasised
   that the franchise build was largely complete and now the focus can be on delivering
   profit growth. The company’s focus on developing the right culture to underpin
   long-term success was also underlined.
 * **Valuation:** Our absolute approaches now indicate a range of 79p-85p. At the
   current price, the 2020 prospective P/E is 4.4x for a business whose impairment
   provisioning already reflects a significant downside scenario and where earnings
   could nearly double over three years. The yield is also double-digit.
 * **Risks:** Credit risk is the biggest threat to profitability. NSF’s model accepts
   more credit risk, where a higher yield justifies it. NSF is innovative, and may
   incur losses piloting products, distribution and customers. 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   have withdrawn; ii) Non-Standard Finance is well-funded, with committed debt 
   funding to 2023; 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 strong loan book growth and 20% EBIT RoA appears credible.
   Plus, investors are paying 6.6x 2019E P/E and getting a 11.1% yield.

[DOWNLOAD THE FULL REPORT](https://www.hardmanandco.com/wp-content/uploads/2020/01/NSF-Sunshine-after-the-rain-17-January-2020.pdf)

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