The world of subprime, doorstep lending is considered by some to be a shady industry. However, for the estimated 10m people in the UK who have been turned away by mainstream lenders, it’s a vital lifeline when times are hard.
Provident used to be the UK’s largest and most respected lender in this space, but the company’s problems over the past two years have dented its reputation. As a result, Non-Standard Finance (LSE: NSF), which is supported by star fund manager Neil Woodford, has seen a surge in business.
Growth opportunity
Non-Standard is led by John van Kuffeler, who founded the business after leaving none other than Provident where he had a 23-year career — including six years as CEO and 17 years as chairman — before he retired in 2013.
Kuffeler has been quick to take advantage of his former employer’s troubles. It’s estimated that his new business has acquired 500 ex-Provident workers over the past 12 months, who all come with their own book of clients — essential in the doorstep lending business.
According to the company’s results for the year to 31 December, the business added a total of 650 new staff during the year and opened 34 new offices to meet the rising demand for it services. Total revenue increased 48% and the total number of customers grew by 24%. That was not only thanks to the higher number of self-employed agents, but the acquisition of George Banco, which helped catapult the firm into the number two position in the UK guarantor loans market.
Overall impairments — a key measure of group credit quality — declined in the year to 24% of normalised revenue, from 29% in 2016. This helped normalised pre-tax profit to grow 42% to £13.5m and allowed management to announce a full-year dividend of 2.2p per share, up 83%, giving a dividend yield of 3.5%.
Growth ahead
As Non-Standard finance continues to build on its strengths as a lender and expand, I believe that earnings can continue to grow at a double-digit rate. So do City analysts, who have pencilled in earnings per share growth of 52% for 2018. Based on this forecast, the shares are trading at a forward P/E of 10.8. The company is also expected to announce a 42% increase in its dividend payout for 2018, giving an estimated forward dividend yield of 4.3%.
Non-Standard isn’t the only doorstep lending firm that has benefited from Provident’s troubles. Morses Club (LSE: MCL), another of Neil Woodford’s small-cap income plays, has also reported an uplift in activity over the past 12 months.
According to a trading update issued at the beginning of March, ahead of the company’s fiscal 2018 full-year results, total credit granted increased 21% to £174m for the year as overall customer numbers increased 6% to 229,000. For the year as a whole, City analysts are expecting the group to report earnings per share growth of 34%, followed by an increase of 22% for fiscal 2019, as the firm continues to build on the opportunity offered by Provident’s troubles.
And like Non-Standard, Morses has also reported an improvement in the credit quality of its borrowers. According to the March trading update, the company also saw impairments “at the upper end” of guidance, thanks to the “quality” of its 229,000 customers.
Based on these estimates, shares in Morses Club are currently trading at a forward P/E of 10.3 and support a dividend yield of 5.6%.
