Hits: 13

23 April 2020

Non Standard Finance – Trading Update

Share Price 10p

Mkt Cap £31m

Conflict Disclosure: No Holding

 

  • Update In the last 4 weeks lending has been to key workers only. Collections at Loans at Home are at 90% of pre lockdown levels and slightly below 90% in guarantor loans. Loans at Home is running at 75% of the expected level. The company is cash flow positive by £3m in the first 3 weeks of April. The company has access to £185m of additional borrowing facilities.

 

  • Estimates The published forecasts of 36% PBT growth I suspect are out of date.

 

  • Valuation On 2019 results expected mid may the shares trade on a PER of 2.4X. Price to net tangible assets.

 

  • Conclusion The share price is doubting the company will survive but having re financed the balance sheet shortly prior to COVID 19 and with today’s encouraging collection and cash flow data it looks highly likely. Which means there is a lot of money to be made here.

11 March 2020

Non- Standard Finance– Refinance 

Share Price 22p

Mkt Cap £75m

Conflict Disclosure: No Holding

  • Securitisation a new £200m securitisation facility from Ares Management Corporation will be available to fund loan book growth for the branch based lending and guarantor loans divisions. It will add £1m to PBT for the year to Dec 2020.
  • Estimates With c £21m PBT forecast this is a c 5% upgrade for 2020 and has the potential to improve the forecast 12% operating margin forecast for 2021.
  • Valuation PER 5.3X Yield 13.8%
  • Conclusion After many years of high top line growth the profitability is now starting to come through while Morses is investing in growth. The shares are the wrong price by a long way. Doubling may not be an aggressive ask.

16 January 2020

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Non Standard Finance – Investor Day 

Share Price 23.5p

Mkt Cap £73m

Conflict Disclosure: No Holding

  • Results to Dec 2019 are expected to be in line with forecasts. Loan book and impairment targets unchanged. Everyday Loans (c.60% of profit) grew the loan book 17% to £218m. Impairments 22.4%. Guarantor loans (c23% profit) grew loan book 29% to £107m. Impairments 22.6%. Home Collected (c 17% profit) loan book shrank from £41m to £39.9m. Impairments were 27% (2018 32.6%). Borrowing were £323m and the company has signed a £150-£200m six year securitisation facility that may reduce lending costs by ( I guess) 2% which could potentially add £3m onto profits.
  • Estimates For the year to Dec 2020 38% PBT growth is anticipated giving 6p EPS and a 3.5p dividend. This estimate doesn’t include the potential financing upside from the securitisation.
  • Valuation PER 5.5X Yield 12.8% from a dividend 1.4X covered for Dec 2019. For 2020 the PER falls to 3.9X
  • Conclusion If we remove our rear view mirror and look forward only the shares are the wrong price. With Woodford and Invesco now out of the stock I suspect a more reasonable share price may be 40p. 

15 November 2019

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Non Standard Finance Plc – Warning and CFO Change

Share Price 33p

Mkt Cap £102m

Conflict Disclosure: No Holding

  • Trading Update  Operating profit is expected to be 10-13% lower than previous expectations on the back of slower trading in branch based lending (4-5%) and a step change in provisioning on the branch based and guarantor loans business due to the macro environment. Delinguency rates however are reported to be steady or have improved form H1 2019. Home Collected credit is performing well as the impairments reduce with a shortening of the loan book duration. Loan book growth targets are being revised down and impairment targets are being revised up in branch based and guarantor loans but down in Home Collected Credit.  The CFO is standing down after Miles Cresswell-Turner standing down last month.
  • Estimates Adjusted EPS of 5.6p for the year to Dec 19 is likely to come down by 10-13% in line with the statement. The adjusted PBT number was expected to be c £21.7m per downgrades but the statutory number is still a loss of c £14m. The guidance is for a 50% payout ratio so the dividend estimate looks likely to reduce also.
  • Valuation PER 5.5X, Yield 8.9% . The NAV is £181m, but the tangible NAV is £49m.
  • Conclusion The second director leaving may be a function of the incentive scheme expiring in March 2020 out of the money.  With shareholders likely to be asked to re incentivise management it seems possible that a corporate solution may be found instead. The shares are cheap on an earnings basis but are still 2X tangible book value.  There may be upside on a corporate solution but bidders are unlikely to be generous.

30 October 2019

Non Standard Finance and others – M&A potential 

Share price 38p

Mkt cap £116m

Conflict Disclosure: No Holding

  • Changes The departure of Miles Cresswell Turner from Non-Standard Finance last week is perhaps predictable as the LTIP is predicated on a share price of 110p and the founder shares require a share price of 125p by March 2020 which at 38p will need some tailwinds.  Blowy ones.  With a diminished financial incentive those that are financially motivated may well take a look at the valuation of the company and see better ways of making money than being employed by it. A PER of 6.7X and yield of 7.8%. But with £27m headroom of the £285m facility at the end of June we may question the company’s ability to continue the growth and the dividend without new funding- which is being sought.
  • Private Equity It has been said that venture capitalists can be financially motivated. Prior to Non-Standard Finance Miles Cresswell Turner was at Duke Street Capital and Palamon partners for 10 years prior to that.  I can’t imagine it would be difficult to persuade private equity of the potential gains to be had from taking NSF private at a time when new debt facilities are being sought and management incentives are expiring while it trades on 6.7X earnings just as growth is slowing and profitability is set to expand.  It may be true that in the absence of the Provident combination and a slowing roll out of branches there is less to do at NSF. But it may be that with 1.08m shares in NSF there are better ways to make money for the financially motivated.
  • Valuation Potential The NAV of the company is £210m, of which £154m is intangible. This is after £33m of those intangibles have been amortised so NAV at cost is £243m, some 109% ahead of the current market cap. With Alchemy holding 19% and Invesco holding 28% it can’t be long until a non-public markets outcome is found. One has to imagine there is 50% upside on a bid or break up. 
  • Others  No doubt the irony of launching a bid for NSF wouldn’t be lost on the board of Provident, which trades on a PE of 9.4X and 1.6X NAV. But they could face private equity competition. Then we have Amigo, the guarantor loans business trading on a PE of 4X.  I suspect we are going to experience some M&A activity in the sector.

22 October 2019

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Non Standard Finance – Director Change 

Share Price 38p

Mkt Cap £117m

Conflict Disclosure: No Holding

  • Change: Miles Cresswell Turner is stepping down from NSF. He was instrumental in building the portfolio and served an CEO pf the branch based lending business.
  • Valuation The shares trade on a PER of 10X and yield 7.7%. Provident Financial trades on 9X and yields 6.1%
  • Implications This underlines the risks of a team incentivised by founder shares which expire in January next year. The shares have a vesting threshold of 105p while the share price is 38p which suggests that investors may want to exercise caution ahead of the incentives going forward being clarified.  Provident on the other hand is now looking interesting.

20 October 2019

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Non Standard Finance – H1 Results  

Share Price 33p

Mkt Cap £105m

Conflict Disclosure No Holding

  • Results Revenue up 12% to £88.3m and normalised PBT up 12% to £6.3m. Exceptional costs of £12.7m for the PFG bid and £12.5m goodwill impairment on Loans at Home. Loan book up 26% to £335.6m driven by 22% growth in Branch-based, 53% in Guaranto and a 6% reduction in Home Credit. Revenue yields declines modestly while impairments declined  modestly on H2 last year driven by an improvement in the Home Credit book. Cost income ratio also declined in all three businesses and now runs at 45.3% in Branch-based, 44.3% in Guarantor and 56.3% in Home Credit.  Outlook says trading is in line with expectations and the group is well placed.
  • Estimates The forecasts I can see look for £22.7m adjusted PBT for the year which assumes a large delta into H2 given £6.3m in H1. The company has hired 70 staff in everyday loans and opened 7 new branches which are anticipated to deliver an uptick in H2.
  • Valuation PER 5.8X and yield 9.2% is an appealing traditional valuation. ROE underlying this year is expected to be 14% while the NAV is 67p/share, twice the current share price although the tangible NAV is 18p/share. Of course writing down the goodwill will improve the ROE going forward
  • Conclusion These shares are now extremely cheap while the results are now improving. With the founder incentive plan maturing in March 2020 and the business improving the company would be vulnerable. There aren’t many acquirers given the regulated nature of the business but private equity may have a look.

20 August 2019

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Non Standard Finance – H1 Results  

Share Price 33p

Mkt Cap £105m

Conflict Disclosure No Holding

  • Results Revenue up 12% to £88.3m and normalised PBT up 12% to £6.3m. Exceptional costs of £12.7m for the PFG bid and £12.5m goodwill impairment on Loans at Home. Loan book up 26% to £335.6m driven by 22% growth in Branch-based, 53% in Guaranto and a 6% reduction in Home Credit. Revenue yields declines modestly while impairments declined  modestly on H2 last year driven by an improvement in the Home Credit book. Cost income ratio also declined in all three businesses and now runs at 45.3% in Branch-based, 44.3% in Guarantor and 56.3% in Home Credit.  Outlook says trading is in line with expectations and the group is well placed.
  • Estimates The forecasts I can see look for £22.7m adjusted PBT for the year which assumes a large delta into H2 given £6.3m in H1. The company has hired 70 staff in everyday loans and opened 7 new branches which are anticipated to deliver an uptick in H2.
  • Valuation PER 5.8X and yield 9.2% is an appealing traditional valuation. ROE underlying this year is expected to be 14% while the NAV is 67p/share, twice the current share price although the tangible NAV is 18p/share. Of course writing down the goodwill will improve the ROE going forward
  • Conclusion These shares are now extremely cheap while the results are now improving. With the founder incentive plan maturing in March 2020 and the business improving the company would be vulnerable. There aren’t many acquirers given the regulated nature of the business but private equity may have a look.

5 June 2019

NSF has lapsed its bid for Provident after a ferocious war of words from both sides. The regulatory capital would not be adequate as with a significant minority of shareholders being opposed to the deal (at least 21%) the minority holdings in Provident would remain reducing the capital available. Exceptional costs are expected to be £10-£10.5m. At the last tally Provident was expecting exception costs of £20m.  It looks like the Provident holding is the third largest in the Woodford income fund.  I suspect that isn’t the end of corporate activity from either of these two companies. 

21 May 2019

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Non Standard Finance – AGM update 

Share Price 48p

Mkt Cap £151m

Disclosure: No holding

  • Update Branch based loans have opened 7 new stores bringing the number to 73. Guarantor loans continues recent trends, For clarity the March results showed 60% loan book growth and impairments growing to 20%.  While loans at Home is increasing its returns as the company shifts the loan book to a shorter duration. Which has been Morses Club strategy for many years.
  • Estimates Not expected to change
  • Valuation  PER 7X yield 7%. 
  • Conclusion Under the terms of the bid NSF will issue 2.26bn new shares. If the dividend was maintained at the anticipated level of 3.74p per share this would cost £84m which in the context of Provident’s anticipated £130m PBT in 2019 looks sustainable. The shares are very cheap

16 May 2019

Non Standard Finance – Bid unconditional 

Share Price 48p

Mkt Cap £149m

Disclosure: No holding

  • Bid NSF has declared the Provident Financial bid unconditional lowering the required acceptance condition to 50%. The total acceptances were 53%. However the regulatory approvals from the FCA, PRA and CMA remain outstanding conditions before the bid can be declared wholly unconditional.
  • Loans at Home If this goes through we can look forward to the demerged IPO of Loans at Home.  The deafening silence from the market over the excitement of this suggests it won’t be enormously valuable.  Morses Club reported £22m PBT from its £73m net loan book last year and trades at £214m mkt cap being 2.9X book or under 10X PBT.  Applying the same PBT multiple to Loans at Home which is a generous assumption given the lower return business) gives a value of £40m. 
  • Conclusions It wouldn’t surprise me if S&U, having sold the Loans at Home business for £82m in July 2015 came back for a round trip now that Loans at Home has completed the investment in technology

10 May 2019

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Provident/NSF – Statements 

Share Price 275p

Mkt Cap £139m

Disclosure: No holding

  • Statements The deadline for NSF’s bid is 15 May at 1pm. NSF statement throws a lot of mud at Provident which makes for good reading accusing them of regulatory widespread mismanagement, over rewarding failure in Malcolm Le May’s bonus and unwarranted reassurances   Provident notes that 96% of the independent shareholders have not accepted the bid yet and refers to Schroders public letter of comfort recently published.
  • Conclusion Nobody looks very good here. Neither company or Woodford/Invesco or , Schroders. Shame

29 April 2019

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Non Standard Finance – Offer Update 

Share Price 45p

Mkt Cap £142m

Disclosure : No holding

  • Update – Non Standard says it has discussed its offer with the PRA and FCA and is confident the conditions associated will be satisfied by 5 June. Consequently it sets the deadline for acceptances to 15 May.
  • Conclusion -It looks likely the offer will go through though it remains to be seen just how quickly it will create value with Loans at Home becoming a separate quoted company and Moneybarn put on the “for sale” block.  Perhaps the opportunity may be if, say, S&U acquires Moneybarn.

11 March 2019

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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:
  1. Everyday Loans is holding a small provision for PPI mis selling from prior to May 2015. This could be a risk.
  1. 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.
  1. 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.

8 March 2019

Non Standard Finance Plc – FY Results 

Share Price 59.4p

Mkt Cap £185m

  • Backdrop Given these results were scheduled for 12 March and Provi had delayed their results to 13 March in response to the bid from NSF and NSF decided last night at 6pm to bring forward results to this morning would suggest these results will be good. Bad numbers take longer to add up. The second implication is I now need to find a suit to head to analyst meeting. So much for a quiet Friday.
  • Results The opening line tells us underlying results are ahead of consensus.  Normalised revenue is up 39% to £166.5m while normalised PBT is up 12% to £14.8m. Reported loss is £1.6m vs £13m loss last year. Normalised EPS is up 8% to 3.7p (2018 3.4p) and the dividend is up 18% over the year to 2.6p. Current trade is in line with expectations. Headroom on debt facilities is £57.2m. There doesn’t seem to be anything new in the comments on the offer for Provident save the letters of intent are now for 49.4% of Provi rather than the 50+% previously following the recent sale of shares by one of the holders which makes the bid modestly less certain.
  • Divisionally Branch based increased its customers 30% with a loan book up 25% and stable impairments at 21.5%. Guarantor increased its customer numbers 44% with a loan book up 61% with 20% impairments. This growth is the area that has outperformed expectations. There is a £1.4m deduction for an increase in deferred consideration on George Banco and if this is added back it looks very strong. Home Credit increased its loan book 2% while impairments fell from 37.6% to 32.6% in line with guidance.
  • Estimates The results are a little ahead of consensus, or a little ahead of what it was before house analysts withdrew their forecasts. Going forward analysts look for 20% revenue growth and 36% adjusted PAT growth.
  • Valuation PER 8.7% yield 6.2%. Provi is on 10.9X and yield 6.1%. Morses Club is on 11.4X and yield is 5.1%. 
  • Conclusion Guarantor is going well while Home Credit is slowing. The bid for Provi looks likely to go through. Given the fact that Loans at Home is to be demerged into a separately listed company this is unlikely to be at an attractive valuation. One would imagine they are better giving it to Morses Club who I imagine would pay a fairer price than the market.  I suspect Morses Clube will be the beneficiary ultimately.

22 February 2019

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Non Standard Finance bid for Provident 

Share Price 58p

Mkt Cap £183m

  • Bid Non Standard Finance announce a firm offer to acquire Provident for paper offering 8.88 shares in NSF for each Provident share which effectively values Provident at the current share price of 511p or £1.3bn. The offer has irrevocable undertakings and letters of intent from over 50% of the Provident shareholders although the bid needs 90% acceptances to go through albeit that NSF has the potential to waive the 90% condition which suggests the bid looks likely to succeed.
  • Combined structure The two home collected credit business will be combined and demerged as a separate entity in order to satisfy CMA concerns. Moneybarn will be sold and Satsuma closed or sold leaving the combined business to operate as three divisions of Credit cards, Branch based lending and Guarantor loans (excluding Home Credit).  There may well be cross selling synergy but the harder cost saving synergies look likely to be in terms of funding costs where NSF may be able to some 3-4% on its funding costs and the cost rationalisation could be substantial.
  • Synergy Provident’s head office costs are some £19m p.a while Non Standard Finance had £3.2m of central cost last year. Home collected business reported a cost income ratio of c 69% in H1. If this was reduced to a more normalised 50% that would add c£70m to the bottom line.  Funding Cost savings of 3% for NSF may add £3-£4m.  The big number here is the Home Collected credit saving which is a heroic assumption to assume that can be changed easily given the structural problem of the Provident collectors being employees rather than self employed.
  • Conclusion It seems the deal may go through if NSF waive the 90% requirement. However I would expect Provident management to be phoning private equity today to arrange a bid for the home collected credit business so they can deliver some upside from this business by way of a bid defence.  It is hard to see other buyers of the whole of Provident.The bid is nil premium but I would expect Provident and NSF share prices to rise today. Capitalising the value of the cost savings could be say £500m which on a combined market cap of the two companies of £1.43bn is 30%.  So shares may reflect an anticipation of a part of this today. It is 24 years since John Van Keffeler was last CEO of Provident Financial. History does repeat itself