H117 Delivering multiple growth options

NSF’s H117 results give greater visibility on further franchise and profit growth. The branch network has opened 8 branches already this year (now 49). The home collect business recruited 229 experienced agents in H117 (and a further 124 in July, up 25% on end 2016). The guarantor business has been quadrupled by acquisition, offering broader products and distribution. The group has also locked in funding for six years thus reducing financing risk in uncertain times. We expect profits from the franchise growth to more than offset further investment and higher funding costs. Our 2018e earnings estimates have been increased by 3%.

• H1 Results detail: Loan book growth +17% overall (16% in branch and home collect, and 44% in guarantor loans). Revenue was up 16%. Impairments rose 13%. Costs rose by 20% (more investment). Operating profit grew 10%, which with lower funding costs, saw pre-tax profit up 26%. The DPS rose 67%.
• Outlook post results: Our 2018 estimates have seen modest upgrades (EPS +3%). Increased profits from including George Banco and the incremental agent hires in home collect have been nearly offset by higher interest costs as NSF has locked in the certainty of a much larger facility for six years.
• Valuation: We reviewed a range of valuation metrics (and sensitivity to assumptions) in our initiation “Carpe Diem” and more recent note Branching Out Investment Accelerated. These indicate a range of 99-108p p/sh on absolute measures. The relative-measures upside is less as the sector appears cheap.
• Risks: Credit risk remains the biggest issue and part of NSF’s model is to accept higher credit risk where a higher yield justifies it. NSF is innovative and may incur losses piloting new products, customers, distribution. Regulation is an issue noting management take appropriate action to mitigate this risk
• Investment summary: Substantial value should be created as: (i) competitors have withdrawn; (ii) NSF is well-capitalised with access to significant debt funding; (iii) positive macro-economic drivers, and (iv) NSF has an experienced management team delivering technological efficiency without compromising the key F2F model. Targets of 20% loan book growth and 20% EBIT ROA appear credible and investors are paying just 9x 2018 PE and getting a 5% yield.