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In the UK, unsecured, non-standard lending market, NSF has the market leading network in branch-based lending, is number three in home credit, and has a scalable platform in the growing guaranteed loans market. It’s medium term targets of 20% loan book growth and a 20% pre-tax return on assets look credible. NSF is under-geared and existing debt facilities will finance our projected growth through to mid-2018. Management is using technology to improve efficiency while not compromising the core personal relationships which are critical to managing credit. Our valuation methodologies indicate c67% upside.

  • Strategy: NSF has made two acquisitions to build scalable platforms. It is now expanding rapidly by geography, staff, distribution channels, and the range of customers to which it will lend. It is being managed by experienced teams and should deliver strong volume growth, wider spreads, and improved efficiency.
  • Non-standard customers are different: Non-standard customers are a broad group (from self-employed, through to historically impaired credits and those on low, variable and cash incomes). The common trait is that a lender must understand the customer’s willingness to repay as well as their ability to repay.
  • Valuation: The average of our absolute approaches is 101p (67% upside). The greatest upside (87%) is in our Gordons Growth model which we believe best captures NSF’s long term growth and value added prospects. Peer valuations have 26% upside but we believe the whole sector is under-valued.
  • Risks: Credit risk is high (albeit inflated by accounting rules) but NSF adopts the right approaches for this market which should be significantly counter-cyclical. Regulatory risk is an issue for all financial companies. The rapid growth strategy means progress has its own risks. NSF has no pension risk.
  • Investment summary: Substantial value should be created as: (i) competitors’ have withdrawn (ii) NSF is well-capitalised and has access to significant debt funding; (iii) positive macro-economic drivers both for demand and credit, and (iv) NSF has an experienced management team delivering technological efficiency without compromising the key model. Its 20% loan book growth and 20% ROA targets appear credible and investors are paying just 11x 2017 PE.
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