# Non-Standard Finance Trading update: understand the accounting

- Link: https://www.directorstalkinterviews.com/non-standard-finance-trading-update-understand-the-accounting/412798247
- Published: 2019-11-18T10:57:13+00:00
- Author: Amilia Stone

**Non-Standard Finance** (LON:NSF) has issued a trading update highlighting a 4%-
5% reduction in consensus estimates due to softer trading in 3Q (primarily lower
loan volumes in guarantor loans, a market which has been affected by adverse press
coverage) and a 6%-8% reduction associated with a step change in provisioning policy.
The latter highlights yet again the importance of understanding the assumptions 
in provisioning. For the same arrears, a higher assumed probability of downside 
has increased provisions. This reflects the known cyclicality inherent in IFRS9.
A downgrade is unwelcome, but it does not reflect current customer deterioration,
only the Board’s cautious approach. After today’s reduction’s, we still forecast
2021 adjusted profits at 2x the level of 2018.

 * **Outlook:** NSF lowered its targets for loan book growth reflecting macro-uncertainty
   and a desire to position the group ahead of the next recession. The ongoing effect
   of the provisioning policy is less than the reduction in impairments from slower
   loan growth, so the forecast nominal provision charge is lower in 2020/2021. 
   As a proportion of revenue, it is somewhat higher.
 * **Strategy:** After today’s reductions, we are forecasting 2019 adjusted pre-
   tax profits of £15.8m (2018: £14.8m) rising to £23.3m in 2020 and £29.9m in 2021.
   Therefore, 2021 is still double the 2018 level. The fundamental strategy of building
   a franchise to deliver strong profit growth remains intact.
 * **Valuation:** Our absolute approaches now indicate a range of 79p-85p. On the
   current price, the 2020 prospective P/E is 4.4x for a business whose impairment
   provisioning already reflects a significant downside scenario. The yield is now
   double-digit.
 * **Risks:** Credit risk is the biggest threat to profitability but the sizeable
   increase in provisions in today’s announcement should mitigate this risk in the
   future. 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) NSF is well capitalised, with committed debt funding; iii)
   macro drivers are positive; and iv) Non-Standard Finance’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 appear credible,
   and 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/2019/11/NSF-Trading-Update-Nov-19.pdf)

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