Non-Standard Finance PLC (LON:NSF) is the topic of conversation when Hardman and Co’s Analyst Mark Thomas caught up with DirectorsTalk for an exclusive interview.
Q1: Non-Standard Finance let its highly contested bid for Provident Financial lapse, where does the group go from here?
A1: While there has been deafening noise around the lapsed Provident Financial bid, the fundamental outlook for 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 circa .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. The strong growth expected as a standalone entity is unaffected by the lapsed deal and we believe investors should now focus on that.
Q2: If we drill down into those business opportunities, what do you see from the branch based business, Everyday Loans?
A2: We reviewed ELD in our reports ‘Reading the runes: strong controlled growth’, published on 5th December 2018 and ‘Everyday Loans: a heart of gold’, published on 14th May 2018.
In summary, we believe there is a long-term growth opportunity from a business with an excellent, sustainable market position. In particular, for the foreseeable future, the company can:
- use technology to deliver an enhanced customer experience and operational efficiency, the opportunities from the latter are designed to enhance the branch face-to-face business model, not replace it;
- generate better leads from deeper, broader broker relationships, focused marketing and improving conversion rates; and
- iii) expand its branch network, with a long-term potential optimal size of the network of 100-120 branches, compared with 65 at the end of 2018, the network has already added eight new branches with 73 now open).
As a standalone business, it offers:
- operational leverage allowing economies of scale, best practice cross-fertilisation, and better control of risk;
- earnings stability in macroeconomic downturn as rate increases and increased non-standard demand offset higher impairments; and
- limited regulatory risk. As part of the NSF group, it has incremental opportunity from cross-sales.
Q3: And in the Guarantor Loans business?
A3: GLD offers exposure to a structurally growing market and the potential opportunity to continue to take share from the market leader. Guarantor loans offer the potential borrower a much lower cost of finance, which is both more affordable and creates the opportunity to re-build a credit record. The strong growth in recent years is evidence of real demand for such a product. The regulatory and reputational risks of involving a third party in the loan have been known about for many years.
In our initiation on NSF published on 11 November 2016, we noted: “From multiple aspects, including treating customers fairly, good business practice and limiting potential mis-selling compensation claims, the guarantor’s responsibility has to be very clearly outlined before the loan is issued.” We believe this has been firmly embedded in NSF practices.
Q4: Finally, how will Non-Standard Finance generate profit growth in the home collect market which appears to be showing very little structural growth if any?
A4: HCC has opportunities in improving credit and efficiency. Having grown significantly under NSF’s ownership, we view this division as having shifted to become a cash-generating machine, rather than significant growth business.