Led by the former chairman of subprime consumer lender Provident Financial (PFG: 3,541p), John Philip de Blocq van Kuffeler, Non-Standard Finance's board is in the early stages of creating a niche-finance company focused on the consumer unsecured lending market. To execute this strategy the company is specifically targeting acquisitions that generate an annual return on equity of between 20 per cent and 30 per cent, have potential to grow lending balances by at least 20 per cent a year, offer strong yields underpinned by APRs of between 50 per cent and 100 per cent, and with impairment levels implying an attractive ratio of risk to the APR.
The company’s first acquisition, Loansathome4u, the home credit division of finance company S&U (SUS: 2,399p), completed during the summer (‘Value judgements’, 3 August 2015), and the purchase price of £82.5m equated to 12.5 times net profit and 2.5 times tangible book value. Everyday Loans is a much larger deal altogether and commands an enterprise value of £235m. It’s more expensively priced at 18 times net operating profit after tax, but importantly it’s faster growing too. In the first half of 2015, Everyday Loans increased operating profit by 10 per cent to £7.6m on revenues and a loan book up 12 per cent to £21.2m and £102m, respectively, having previously delivered annualised growth of 17 per cent in its net loan book between 2012 and 2014 which in turn boosted annual operating profit by 90 per cent to £15.5m over the two-year period.
Mr van Kuffeler believes that the fast growing business can deliver even more with Non-Standard Finance’s financial backing. To achieve this the plan is to ramp up its branch expansion programme (Everyday Loans has only opened seven branches since 2012 to take the estate to 35 shops); accelerate its guaranteed loans operations by improving lead generation through its broker network; and by targeting a broader customer base and offering a wider range of products. It’s worth noting too that given the funding structure of the acquisition it will be immediately earnings accretive.
Funding structure
That’s because of the £235m consideration, £215m is payable in cash of which £108m will be used to settle intercompany debt with Secure Trust Bank. The vendor is also accepting £20m of equity in Non-Standard Finance shares. To fund the balance of the consideration, Non-Standard Finance will drawdown £35m of a new £55m three-year revolving credit facility with Royal Bank of Scotland and Shawbrook Bank. Secure Trust Bank is providing a £30m term loan to the company over the same term.
In addition, the company is raising £160m through a placing and open offer at 85p a share. Qualifying shareholders on Non-Standard Finance’s share registrar on Thursday, 3 December are entitled to participate in the open offer by subscribing for 59 new shares for every 33 currently held. This means that if you followed my original advice to buy the shares at 103p in March, then this brings your average buy-in price to 91.5p, marginally above the current share price which has adjusted downwards to reflect the change in share capital. The company’s pro-forma net asset value is about £266m post the acquisition and capital raise which based on 311m shares in issue equates to a book value per share of 86p.
In the circumstances, I would recommend you take up your open offer allocations at 85p a share given that the funding structure means the acquisition is immediately earnings accretive and that’s before factoring in the uplift to profits that Non-Standard Finance’s experienced management team believe is possible.
Deal highlights hidden value in Arbuthnot shares
The disposal is also good news for Arbuthnot Banking’s shareholders as shares in Secure Trust re-rated sharply post the announcement. That reflects the fact that Secure Trust will bank a £115m gain on the sale and the capital raised will enable the company to invest more in its fast growing motor finance, retail finance and SME lending activities. And through its £20m equity stake in Non-Standard Finance, the company will benefit from any valuation uplift the new owners can create in its former Everyday Loans business.
Importantly, this is not reflected in the market valuation of Arbuthnot Banking as the company’s 51.9 per cent stake in Secure Trust is now worth £311m, or 35 per cent more than its own market capitalisation. Moreover, we are getting a free ride on Arbuthnot’s private banking division, a business which analysts believe will be able to turn in pre-tax profits of £7m in the current financial year, a view I concur with. Indeed, this unit more than doubled half-year profits to £3.7m, buoyed by the hiring of new private bankers, a sharp increase in new clients opening accounts, improved outcome from its Dubai office, and after factoring in the contribution from the Dunfermline Building Society residential mortgage book, acquired from its administrators a year ago.
In fact, I reckon Arbuthnot has a sum-of-the-parts value closer to 2,200p a share, or more than 2.5 times its last reported book value. Add to that a prospective dividend yield of 2 per cent and the shares continue to rate a bargain buy in my view at 1,530p.
Please note that for a limited period of time, my book Stock Picking for Profit is being offered for sale at a promotional price of £11.99 plus postage, subject to availability, full details enclosed below.
MORE FROM SIMON THOMPSON...
I have published articles on the following companies since the start of last week:
■ First Property: Run profits at 47.5p ('Investing for bumper gains', 30 Nov 2015)
■ Paragon: Run profits at 384p; Redde: Run profits at 174p; Fairpoint: Run profits at 175p ('Capitalising on investor overreactions', 1 Dec 2015)
■ LMS Capital: Tender your pro-rata allocation ('LMS tender on the money', 1 Dec 2015)
■ Vertu Motors: Buy at 78p, new target range of 85p to 90p ('In the fast lane', 2 Dec 2015)
■ MS International: Run profits at 210p, target bull market high of 240p ('Engineered recovery', 2 Dec 2015)
■ Mountview Estates: Buy at 11,500p ('Mountview's accounts reveal hidden value', 2 Dec 2015)
■ Character: Buy at 485p, new target 600p ('Playtime for a popular Character', 2 Dec 2015)
■ UK housebuilding sector: Buy and hold until end March 2016 ('Time to start building once more', 7 December 2015)
■ GLI Finance: Recovery buy at 35p (‘Refinancing for GLI Finance’, 9 December 2015)
■ Ensor: Hold at 90p and await news of disposals; Renewable Energy Generation: Await capital payout of 60p a share in January 2016 (‘M&A updates’, 9 December 2015)
■ Non-Standard Finance: Buy at 89p and take up open offer; Arbuthnot Banking Group: Buy at 1,530p, break-up value 2,200p (‘Speciality finance plays’, 9 December 2015)
■ For a limited period and strictly subject to stock availability, Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com at a special promotional price of £11.99, plus £2.95 postage and packaging, or by telephoning YPDBooks on 01904 431 213 to place an order. It is being sold through no other source. Simon has published an article outlining the content: 'Secrets to successful stockpicking'
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