- As One Savings Bank and Charter Court Financial Services reveal a merger I am reminded that these challenger banks are all disappearing through corporate activity. Clydesdale and Yorkshire Bank have acquired Virgin Money while both Aldemore and Shawbrook have gone private. Metro in turn has issues at the moment. We are reminded of the changing state of the industry where at a certain size banks can’t do specialist lending and so become like all the others. Years ago we had retail banks and merchant banks but in the era of credit expension the retail banks bought the merchant banks. In recent years the challenger banks have emerged only to end up combining. I am hoping the new breed of specialist banks such as PCF Bank and potentially Orchard Funding will become the next wave.
Non Standard Finance – Prospectus
Share Price 59p
Mkt Cap £184m
- Prospectus – One of the less welcome facts of bids is that sometimes a prospectus gets published just as the international rugby is starting on a Saturday. A brief scamper through the prospectus at half time showed me that:
- Everyday Loans is holding a small provision for PPI mis selling from prior to May 2015. This could be a risk.
- The plan with Loans at Home is to issue the staff with £2k of options each on demerging it into a separate quoted company which could make it harder for Morses to win hearts and mids if they took over the business.
- The FRC are investigating Provident for not disclosing the FCA investigation around their add on products in their accounts. This is something I recall one shareholder is persuing legal action over. Should this turn out to be a beach of the companies act it could also potentially be an offence under FCA rules and bring a significant liability with it
- Conclusion While it seems merging these two companies may appear sensible given some worthwhile synergies and given the letters of intent and irrevocables amount to 50.0061% the merger looks likely to go through. However the shareholders of NSF are taking on some risk inherent in Provident Financial’s past performance. That’s OK if you are shareholders in both but if you only hold NSF you may need to think twice about the risks of Provident. Provident’s response this morning highlights the significant operational and execution risks, NSF’s track record of value destruction and their limited experience across Provident’s range of businesses. It would be a strange outcome if Provident’s best defence was to illustrate that their business was too risky to be acquirable.
Orchard Funding Group – H1 Results
Share Price 83p
Mkt Cap £18m
- Results The loan book has increased 10% over the period which combined with an average gross rate on loans reducing from 6.54% to 6.22% has delivered a 4% revenue increase to £2.77m. Unlike most other lenders IFRS 19 has resulted in no increase in provisions which has increased the operating margin from 37.3% to £42.5% so PBT has increased 18% to £1.18m. EPS was up 19% to 4.48p. Barclays have increased the facility to £17m and Conister have renewed their facility. Competition remains intense at the pricing level particularly in professional fee funding. Dividend in maintained in H1 and the outlook notes there has been no material change since the period end.
- Estimates There are no published estimates currently. However the last note published in November 18 expected £1.9m PBT for the full year at the underlying level before £600k of bank investment costs. Given the company has delivered £1.2m PBT before one off bank costs in H1 this looks too low.
- Valuation The shares trade on a PER of 16X the EPS post one off bank costs which is 11.4X underlying profit before upgrades while the yield is 3.9%. Underlying ROE is c 12% while the shares trade at 1.25X book value.
- Conclusion This is the lowest risk quoted lender which is underlined by the effect of IFRS 19 on these numbers. The book is growing in a competitive market and the company’s strategy to pbtain a bank license should enable them to compete against their peers to accelerate growth. With the shares having fallen to an all time low this could be an opportunity.
River & Mercantile – H1 Results
Share Price 244p
Mkt Cap £200m
- Results Adjusted PAT was down 12.5% to £8.6m while statutory PAT was down 26% to £6.7m. Diluted EOS down 23% to 8.08p. Fee earning AUM was up 1% over the period and net inflows were £1.3bn. Adjusted pre tax margin was 24% but removing the effect of investments the company adjusts this to 29%. The investment costs appear to be £1.2m which is made up of new staff to expand the solutions business in terms of an ILC team and increases in New York and Australian presences. The outlook statement is “strongly positioned”
- Estimates Full year PAT is expected to be £16.6m. Assuming this is at the adjusted level it looks achievable
- Valuation PER 13, yield 6.5%
- Conclusion The shares are supported by yield. However part of the yield is dependent on performance fees which given poor fund performance may turn out to be variable. It may be a little early for the recovery yet.