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Non-Standard Finance PLC  -  NSF   

Full Year Results to 31 December 2017

Released 07:00 13-Mar-2018

RNS Number : 4893H
Non-Standard Finance PLC
13 March 2018
 

Non-Standard Finance plc

('Non-Standard Finance', 'NSF', the 'Company' or the 'Group')

Unaudited Full Year Results to 31 December 2017

 

13 March 2018

 

Operational highlights

 

•     Combined loan book up 30% on a like-for-like basis to £247.9m before fair value adjustments (£259.8m after fair value adjustments) at 31 December 2017

•     Reduced rate of impairment for the Group as a whole of 24.0% of normalised revenue1 (2016: 29.2%)

•     34 new offices opened and over 650 new staff and self-employed agents added

•     Total number of customers up 24% to 169,000 (2016: 136,500); up 16% on a pro forma basis

•     Acquisition of George Banco to create the clear number two in the UK's guarantor loans market

•     Each of our three divisions has a fully-scalable operating platform to support our future growth plans

•     £260m of long-term debt funding now in place

 

Financial highlights

 

•     Normalised revenue1 up 48% to £119.8m (2016: £81.1m); reported revenue of £107.8m (2016: £72.8m)

•     Normalised operating profit2 before temporary additional commission up 72% to £26.9m (2016: £15.6m); reported operating profit of £3.8m (2016: operating loss of £5.2m)

•     Normalised profit after tax2 before temporary additional commission up 42% to £13.5m (2016: £9.5m); the reported loss after tax of £10.3m (2016: £8.0m) is after fair value adjustments, amortisation of acquired intangibles and exceptional items

•     Recommended final dividend of 1.70p per share (2016: 0.9p) making a total dividend for the year of 2.20p per share (2016: 1.2p)

•     Current trading: Each of our businesses has made a good start to the year with continued strong loan book growth whilst maintaining tight control of impairment

 

Year to 31 December

2017

2016

% change


£'000

£'000


Normalised revenue1

119,756

81,099

+48%

Reported revenue

107,771

72,757

+48%





Normalised operating profit2 before temporary additional commission

26,868

15,595

+72%

Reported operating profit (loss)

3,802

 (5,232)

n/a





Normalised profit before tax before temporary additional commission2

16,387

12,111

+35%

Reported (loss) before tax

 (13,021)

 (9,342)

-39%





Normalised profit after tax before temporary additional commission2

13,461

9,492

+42%

Reported (loss) after tax

(10,335)

(7,998)

-29%





Normalised earnings per share3 before temporary additional commission

4.25p

3.09p

+38%

Reported (loss) per share

(3.26)p

 (2.60)p

-25%





Full year dividend per share

2.20p

1.20p

+83%

1 Adjusted to exclude fair value adjustments

2 Adjusted to exclude fair value adjustments, amortisation of acquired intangibles and exceptional items

3Basic and diluted earnings (loss) per share based on the weighted average number of shares in issue of 316,901,254
(2016: 307,315,588)

John van Kuffeler, Group Chief Executive Officer, said

"2017 was a year of delivery with significant organic loan book growth whilst impairment reduced from 29% to 24% of normalised revenue.  I am pleased to say that these trends have continued into the current year. With strong market positions in each of our chosen segments, a clear plan for growth and long-term funding in place, we remain confident in the full year outlook and are pleased to recommend a final dividend to 1.70p per share making 2.20p for the year as a whole (2016: 1.2p), an increase of 83% over the prior year."

 

Context for results

•     The Group acquired George Banco on 17 August 2017; Everyday Loans, including TrustTwo, on 13 April 2016; Loansathome4u (now Loans at Home) on 4 August 2015 

•     The 2016 and 2017 reported results include fair value adjustments, amortisation of acquired intangibles and exceptional items relating to the acquisitions. Normalised results are presented to demonstrate Group performance before these items.

 

Financial summary

 

Year ended 31 December 2017

 

Normalised before temporary additional commission

Temporary additional commission2

Normalised1

Fair value

adjustments,

amortisation of acquired intangibles and exceptional items

Reported


£'000

£'000

£'000

£'000

£'000

Revenue

119,756

-

 119,756

 (11,985)

107,771

Other operating income

1,926

-

1,926

-

1,926

Impairments

 (28,795)

-

(28,795)

-

  (28,795)

Admin expenses

 (66,019)

(3,184)

 (69,203)

 (7,897)

 (77,100)

Operating profit

26,868

(3,184)

 23,684

 (19,882)

3,802

Exceptional items

                     -

-

 -

 (6,342)

 (6,342)

Profit (loss) before interest and tax

26,868

(3,184)

 23,684

 (26,224)

 (2,540)

Finance cost

 (10,481)

-

(10,481)

-

 (10,481)

Profit (loss) before tax

16,387

(3,184)

 13,203

 (26,224)

 (13,021)

Taxation

 (2,926)

613

(2,313)

4,999

2,686

Profit (loss) after tax

13,461

(2,571)

 10,890

 (21,225)

 (10,335)







Earnings (loss) per share3

4.25p


3.44p


 (3.26)p

Dividend per share

2.20p 




2.20p

 

Year ended 31 December 2016

 

Normalised before temporary additional commission

Temporary additional commission2

Normalised1

Fair value

adjustments,

amortisation of acquired intangibles and exceptional items

Reported


£'000

£'000

£'000

£'000

£'000

Revenue

81,099

-

81,099

(8,342)

72,757

Other operating income

450

-

450


450

Impairments

(23,651)

-

(23,651)

-

(23,651)

Admin expenses

(42,303)

(1,771)

(44,074)

(10,714)

(54,788)

Operating profit (loss)

15,595

(1,771)

13,824

(19,056)

(5,232)

Exceptional items

-

-

-

(626)

(626)

Profit (loss) before interest and tax

15,595

(1,771)

13,824

(19,682)

(5,858)

Finance cost

(3,484)

-

(3,484)

-

(3,484)

Profit (loss) before tax

12,111

(1,771)

10,340

(19,682)

(9,342)

Taxation

(2,619)

341

(2,278)

3,622

1,344

Profit (loss) after tax

9,492

(1,430)

8,062

(16,060)

(7,998)







Earnings (loss) per share3

3.09p


2.62p


(2.60)p

Dividend per share

1.20p




1.20p

1 Adjusted to exclude fair value adjustments, amortisation of acquired intangibles and exceptional items

2 When a new home credit agent agrees to provide lending and collection services to the Group, we may decide to offer a limited period of additional commission whilst the agent builds up a critical mass of active loan customers

3 Basic and diluted earnings (loss) per share based on the weighted average number of shares in issue of 316,901,254 (2016: 307,315,588)

- Ends -

Interviews with John van Kuffeler, Group Chief Executive Officer and Nick Teunon, Chief Financial Officer

Interviews with John van Kuffeler and Nick Teunon will be available as video and text from 7.00 am on 13 March 2018 on the Group's website: www.nsfgroupplc.com.

Analyst meeting, webcast, dial-in and conference call details for 13 March 2018

There will be an analyst meeting at 11.00 am on 13 March 2018 for invited UK-based analysts at the offices of JP Morgan, 60 Victoria Embankment, London, EC4Y 0JP (the entrance is in John Carpenter Street). The meeting will be simultaneously broadcast via webcast and conference call. To watch the live webcast, please register for access by visiting the Group's website: www.nsfgroupplc.com. Details for the dial-in facility are given below. A copy of the webcast and slide presentation given at the meeting will be available on the Group's website later today.

Dial-in details to listen to the analyst presentation at 11.00 am, 13 March 2018

 

10.50 am

Please call + 44 330 336 9105 (PIN: 9257286)

Title

NSF Full Year Results

11.00 am

Meeting starts

All times are Greenwich Mean Time (GMT).

 

For more information:

Non-Standard Finance plc

John van Kuffeler, Group Chief Executive

Nick Teunon, Chief Financial Officer

Peter Reynolds, Director, IR and Communications

 

+44 (0) 20 3869 9020

The Maitland Consultancy

Andy Donald

Peter Hamid

Finlay Donaldson

+44 (0) 207 379 5151

 

About Non-Standard Finance

Non-Standard Finance plc is listed on the main market of the London Stock Exchange (ticker: NSF) and was established in 2014 to acquire and grow businesses in the UK's non-standard consumer finance sector. Under the direction of its highly experienced main board, the Company has acquired a sustainable group of businesses offering credit to the c.10-12 million UK adults who are not served by (or choose not to use) mainstream financial institutions. Its three business divisions are: unsecured branch-based lending, home-collected credit and guarantor loans.  Each division is fully authorised by the FCA and has benefited from significant investment in branch expansion, recruitment, training and new IT infrastructure and systems. These investments have supported the delivery of improved customer outcomes together with growing financial returns for shareholders. 

 

Group Chief Executive's Report

 

2017 Full year results

A number of key operational and strategic milestones were achieved in 2017:

·      Everyday Loans:

appointed Miles Cresswell-Turner as CEO and strengthened the senior management team

opened 12 new branches

launched two new products and added 77 new staff

processed over 1 million loan applications for the first time

·      Loans at Home:

promoted Davie Thompson to become CEO and invested £5.3m to help drive a 53% increase in the net loan book

opened 22 new offices

added over 100 staff and 442 self-employed agents to our network

completed the roll-out of our latest handheld technology to all agents

reached over 104,000 customers

obtained a full licence from the FCA

·      Guarantor loans:

acquired George Banco to become the clear number two player

obtained a full licence from the FCA for George Banco following its acquisition

·      Group

refinanced £115m of existing bank facilities with £260m of new long-term funding

Recommended final dividend equates to a payout ratio of more than 50% of underlying earnings

These achievements contributed to strong loan book growth in all three divisions and the combined net loan book at 31 December 2017 increased by 51% to £247.9m, before fair value adjustments (2016: £164.6m) and to £259.8m (2016: £180.4m) after fair value adjustments.  Adjusting for the acquisition of George Banco, the year-on-year increase in the net loan book before fair value adjustments was 30% (2016: £191.4m).  A summary of the key performance indicators for each of our businesses is shown below:

 

Key performance indicators

Year ended 31 Dec 17

Normalised4

Branch-based lending

Home credit

 

Guarantor Loans

Loan book growth

21.3%

53.3%

35.4%

Revenue yield5

45.8%

147.0%

35.8%

Risk adjusted margin6

37.0%

101.3%

30.3%

Impairments/revenue

19.1%

31.1%

15.3%

Impairments/average net loan book

8.8%

45.7%

5.5%

Operating profit margin

37.2%

6.1%

37.3%

Return on assets7

17.0%

9.1%

13.4%





4   Excluding fair value adjustments, the amortisation of acquired intangibles and exceptional items

5   Revenue as a percentage of average loan book excluding fair value adjustments (twelve month average)

6   Revenue less impairments as a percentage of average loan book excluding fair value adjustments (twelve month average)

7 Operating profit as a percentage of average loan book excluding fair value adjustments (twelve month average)

This strong growth increased normalised revenue by 48% to £119.8m (2017: £81.1m) and normalised operating profit, before £3.2m of temporary additional commission at Loans at Home, increased by 72% to £26.9m (2016: £15.6m).  Normalised operating profit after these costs increased by 71% to £23.7m (2016: £13.8m) and normalised earnings per share increased by 31% to 3.44p (2016: 2.62p).  Adjusting for the one-off nature of the temporary additional commission, normalised earnings per share were 4.25p (2016: 3.09p). 

The Group's 2017 reported, or statutory results are significantly affected by the acquisition of George Banco, the full year impact of the April 2016 acquisition of Everyday Loans (including TrustTwo), fair value adjustments and the amortisation of acquired intangibles. 

Reported revenue after fair value adjustments, was up 48% to £107.8m (2016: £72.8m) while the sale of a non-performing loan portfolio generated other operating income of £1.9m (2016: £0.5m).  A 40% increase in administration costs to £77.1m (2016: £54.8m) included £3.2m of Loans at Home temporary additional commission and £2.1m of other Loans at Home related expansion costs.  Finance costs increased due to strong loan book growth and the impact of the Group's new financing arrangements (see below) while exceptional items totalled £6.3m (2016: £0.6m) primarily reflecting the write-off of previously capitalised fees associated with prior period debt raising. The net result was that the Group delivered a reported loss before tax of £13.0m (2016: loss of £9.3m) and a reported loss per share of 3.26p (2016: loss per share of 2.60p).

Reflecting our confidence in the outlook, the Board is recommending a final dividend of 1.70p making a total of 2.20p for the year (2016:1.2p).  This represents a 50% pay-out ratio based on adjusted normalised earnings per share (before £3.2m of Loans at Home temporary additional commission) of 4.25p.

 

Branch-based lending

Our largest business, Everyday Loans delivered an outstanding performance with a particularly strong second half driven by increased loan volumes, higher yield and lower impairment.  The change of pace and ambition was led by a revitalised senior management team under the stewardship of Miles Cresswell-Turner who took over the leadership of the business in May 2017.  Normalised operating profit (before fair value adjustments, amortisation of acquired intangibles and exceptional items) was up 53% to £22.7m (2016 £14.8m).

Contributing to this strong growth was the expansion of our branch network with 12 new branches opened during the year and each new branch performing as expected.  As a result, there were 53 branches open at the end of 2017, a 47% increase since we acquired the business in April 2016. We also extended our product range in 2017 with the launch of the 'Selfy' loan, a tailored product for self-employed customers, as well as a new 12-month loan that is particularly suited to new customers. 

 

Home credit

Davie Thompson was promoted to CEO of Loans at Home in January 2017 and has overseen a transformational period for the business.  Our plan for growth was accelerated by the announcement of a major restructuring by the market leader in February 2017.  This resulted in us being approached by large numbers of self-employed agents and management staff that were keen to join Loans at Home.   By 31 December 2017 we had added over 440 experienced self-employed agents as well as over 100 staff to our business; we had also opened 22 new offices. While there was an associated investment of £5.3m (comprising £3.2m of Loans at Home temporary additional commission and £2.1m of other expansion related costs), the collections and lending performance of the new agents has been particularly strong and helped to drive a 53% increase in the loan book, a reduction in the rate of impairment and an 11% increase in the number of customers.  Before temporary additional commission, normalised operating profit was up 73% to £6.3m (2016: £3.6m); after deducting these costs, normalised operating profit was up 67% to £3.1m (2016: £1.9m).

 

Guarantor loans

The Group acquired George Banco on 17 August 2017 to become the clear number two in the UK guarantor loans market.  Under the leadership of Marc Howells, the CEO of George Banco, our guarantor loans division enjoyed strong loan book growth in 2017, up 35% on a like-for-like basis.  This helped to drive normalised operating profit that increased by 497% to £2.7m (2016: £0.5m).

 

Strategy

We provide unsecured credit to the 10-12 million UK consumers who are unable or unwilling to borrow from mainstream institutions, either because they are on low or variable earnings, are credit impaired, have a thin credit file or have had an unsatisfactory experience of borrowing from mainstream lenders.  With a net loan book of almost £250m (before fair value adjustments) and almost 169,000 customers at the end of December 2017, we represent an important source of credit for consumers, credit that many other lenders are not prepared to provide but which plays a meaningful part in helping to drive the UK economy.

Where we differ from many of our competitors is that when lending direct, in addition to conducting a digital credit check, we also aim to meet potential customers face-to-face.  Whilst an expensive model to operate, this represents an important part of our underwriting process and helps us to better understand the customer's circumstances and make better lending decisions.  Having delivered annual loan book growth of more than 20% in 2017, we remain focused on reaching our second target of a 20% return on assets in each of our operating businesses. 

This will be achieved through the continued execution of our business strategy that comprises the following three elements:

 

1.  Being a leader in each of our chosen business segments

We subscribe to the view that leadership is a key driver of long-term success and are well-placed in all three areas of our business:

·      Branch-based lending - Everyday Loans is the clear market leader in unsecured branch-based lending to the credit impaired with 47,000 customers. 

·      Home credit - Loans at Home is ranked third in the market having grown strongly with over 104,000 customers in 2017.

·      Guarantor loans - Following the acquisition of George Banco, we are now the clear number two in the market with a loan book of close to £50m and over 17,000 customers. 

 

2.  Investing in our core assets

Through suitable investment in people, our distribution networks, technology and brands, we are increasing our capacity to drive further loan book growth whilst at the same time managing operational risks through effective spans of control.

 

People - establishing a good relationship with our customers through face-to-face contact is at the heart of our business model and in 2017 we increased the size of our workforce by 40% to over 750 full time employees.  We launched a sharesave scheme for all staff so they can participate in the future success of the Group.  In home credit, we also recruited over 440 experienced self-employed agents taking our total number to over 1,000.  Such expansion required significant investment in training and incentives that are focused on rewarding both financial results and the delivery of good customer outcomes. 

 

Distribution networks - we opened 12 new Everyday Loans branches in 2017 taking the total number now open to 53 - we plan to open a further 12 in the first half of 2018.  At Loans at Home we opened 22 new offices to support the rapid expansion of our self-employed agent network and we now have 69 locations (including the head office) across the UK.

 

Technology - while face-to-face contact lies at the heart of both branch-based lending and home credit, all three of our business divisions rely heavily on 24/7 access to scalable and robust technology.  With thousands of customers up and down the country, effective data management and analysis ensures that we can process large volumes of transactions, conduct full credit scoring and lead management and can monitor and optimise our day-to-day business performance. 

 

Brands - securing the trust and confidence of your customers and other key stakeholders is vitally important, especially now that purchase decisions for financial services are increasingly made online or through remote channels. The quality of our service and size of our customer base means that continuing to invest in our brands and reputation is a source of substantial long-term value for the Group.  

 

3.  Acting responsibly

How we behave as a business is not just defined by prevailing laws or regulations but also by our culture or 'how we do things around here'.  Right at the outset and at the very heart of our long-term strategic plan was the vision that Non-Standard Finance plc would represent the very best in consumer credit, with the highest standards of compliance and best practice. 

We monitor closely how our behaviour and conduct might impact our key stakeholders, whether they be customers, staff, self-employed agents, suppliers, our environment or the communities where we have a physical presence.  Through a number of initiatives across the Group, including a series of employee workshops, we have identified a number of core behaviours that we see as being vital if we are to achieve our strategic goals:

 

·      Doing the right thing: we recognise our collective responsibility for delivering great outcomes for our customers, even when others are not looking.

·      Integrity: we respect colleagues and other key stakeholders and always do what we say we will do.

·      Shared purpose delivered through teamwork: we have clear goals and expect all of our people to share in that vision. By working together we are likely to solve problems more effectively than trying to do things on our own.

·      Clear communication: we are well-informed and listen carefully to those dealing direct with our customers; we also speak up when something is not right; we celebrate success and don't blame others when something goes wrong, always learning from our mistakes.

·      Entrepreneurial leadership: we lead by example and use our initiative, trying new things so we can improve.

 

By embedding each of these into our employee review protocol we aim to formalise the process by which we recognise and reward these values and behaviours so that we can stand out from our competitors.

 

Financing

On 3 August 2017 we announced the acquisition of George Banco, the number two provider of guarantor loans in the non-standard sector, for £18.6m (representing an enterprise value of approximately £53.5m). To finance the acquisition and refinance all of the Group's existing debt facilities, as well as to provide additional funding to support future growth, we secured a new £175m term loan facility (the 'Term Loan'), provided by a group of institutional investors, led by Alcentra Limited. The new six-year loan bears an interest rate of LIBOR plus 7.25% per year with interest payable every six months. The same investors also agreed to provide an additional committed facility of up to £50m under the same terms as the Term Loan taking their total commitment to the Group to £225m.  In addition, the Group secured a new £35m revolving credit facility provided by Royal Bank of Scotland at an interest rate of LIBOR plus 3.5% per year.

As at 31 December 2017 the Group had cash at bank of £11.0m (2016: £5.2m) and gross borrowings of £208.1m (2016: £87.3m) leaving total headroom on the Group's debt facilities of £51.9m (2016: £12.9m). 

 

Regulation

With each of our three business divisions now fully authorised by the Financial Conduct Authority ('FCA'), we believe we have established a constructive dialogue with the regulator at both an operational as well as at a more strategic level. 

The FCA published a number of documents regarding consumer credit in 2017 and while there appear to be no concerns regarding branch-based lending or guarantor loans, through its ongoing review of high-cost credit, the FCA is continuing to improve its understanding of certain segments, including home credit.  We welcomed the FCA's latest update confirming that they are making good progress and recognising that:

"Consumers can benefit from using high-cost credit where repayments are sustainable and appropriate forbearance is shown if they have temporary repayment problems." (Source - High-Cost Credit Review - Update - FCA, 30 January 2018)

 

Through our regular interactions with the FCA, as well as through formal consultations, we continue to inform the FCA's understanding around home credit and its importance to over a million UK consumers.

 

In its response to 'Good work: the Taylor Review of modern working practices', the Government announced in February 2018 its intention to consult widely on a variety of matters affecting the UK workforce, including employment status.  With a network of over 1,000 self-employed agents, the majority of whom are women, we are monitoring these developments closely and will be contributing to the consultations in due course.     

 

Final dividend

Having declared a half-year dividend of 0.5p per share in August 2017 (2016: 0.3p), the Board is pleased to recommend a final dividend of 1.70p per share (2016: 0.9p), making a total of 2.20p for the year as a whole (2016: 1.2p). If approved by shareholders, based on normalised post-tax earnings before temporary agent commission, this would mean that we had exceeded our medium-term target of a payout ratio of 50%.

If approved at the Company's Annual General Meeting on 14 May 2018, the final dividend would be paid to those shareholders on the Company's share register on 18 May 2018 (the 'Record Date'), with payment being made on 15 June 2018.

 

Current trading and outlook

We have made a good start to the year with each of our business divisions continuing to deliver strong loan book growth whilst maintaining tight control on impairment.  We therefore remain confident about the Group's full year prospects.

 

 

John van Kuffeler

Group Chief Executive

 

13 March 2018

 

 

Financial review

Given the unusual circumstances that prevailed in the home credit market during 2017, we have broken out the temporary additional commission paid to newly signed-up agents during 2017.  Normalised figures are before fair value adjustments, the amortisation of acquired intangibles and exceptional items. 

Group 2017 full year results

The reported Group results for the year ended 31 December 2017 include a full period of Everyday Loans (including TrustTwo) that was acquired on 13 April 2016 and approximately four and a half months' performance of George Banco that was acquired on 17 August 2017. The prior year reported figure included approximately eight months' performance from Everyday Loans (including TrustTwo).

 

Year ended 31 December

 


2017

Normalised

2017

Fair value

adjustments,

amortisation of acquired

intangibles and exceptional items

2017

 



£'000

£'000

£'000

Revenue


119,756

 (11,985)

107,771

Other operating income


1,926

-

1,926

Impairments


 (28,795)

-

 (28,795)

Admin expenses


 (66,019)

 (7,897)

 (73,916)

Temporary additional commission


 (3,184)

-

 (3,184)

Operating profit


23,684

 (19,882)

3,802

Exceptional items


-

 (6,342)

 (6,342)

Profit (loss) before interest and tax


23,684

 (26,224)

 (2,540)

Finance cost


 (10,481)

-

 (10,481)

Profit (loss) before tax


13,203

 (26,224)

 (13,021)

Taxation


 (2,313)

4,999

2,686

Profit (loss) after tax


10,890

 (21,225)

 (10,335)






Earnings (loss) per share


3.44p


(3.26)p

Dividend per share


2.20p


2.20p

 

Period ended 31 December

 


2016

Normalised

2016

Fair value

adjustments,

amortisation of acquired

intangibles and exceptional items

2016

 



£'000

£'000

£'000

Revenue


81,099

(8,342)

72,757

Other operating income


450

-

450

Impairments


(23,651)

-

(23,651)

Admin expenses


(42,303)

(10,714)

(53,017)

Temporary additional commission


(1,771)

-

(1,771)

Operating profit (loss)


13,824

(19,056)

(5,232)

Exceptional items


-

(626)

(626)

Profit (loss) before interest and tax


13,824

(19,682)

(5,858)

Finance cost


(3,484)

-

(3,484)

Profit (loss) before tax


10,340

(19,682)

(9,342)

Taxation


(2,278)

3,622

1,344

Profit (loss) after tax


8,062

(16,060)

(7,998)






Earnings (loss) per share


2.62p


(2.60)p

Dividend per share


1.20p


1.20p

Normalised revenue was £119.8m (2016: £81.1m) reflecting just over four months' contribution from George Banco that was acquired on 17 August 2017 and a full period of Everyday Loans (including TrustTwo).  Figures for the prior year included just eight months of Everyday Loans (including TrustTwo).

Normalised operating profit, before temporary additional commission of £3.2m (2016: £1.8m), was up 72% to £26.9m (2016: £15.6m). After deducting these costs, normalised operating profit was up 71% to £23.7m (2016: £13.8m). As a result, the reported operating profit was £3.8m (2016: loss of £5.2m). Exceptional costs of £6.3m (2016: £0.6m) included the write-off of previously capitalised fees incurred in connection with the Group's previous debt raising as well as M&A-related costs.  Finance costs increased to £10.5m (2016: £3.5m) due to the increased levels and higher cost of borrowing under the Group's new debt arrangements resulting in a reported loss before tax of £13.0m (2016: loss of £9.3m). A tax credit of £2.7m (2016: £1.3m) meant that the loss after tax was £10.3m (2016: £8.0m) equating to a reported loss per share of 3.26p (2016: loss per share of 2.60p).

A more detailed review of each of the operating businesses is outlined below.

 

Pro forma normalised divisional results

In order to set out clearly the underlying performance of the Group, the table below provides an analysis of the normalised results for the Group for the twelve month period to 31 December 2017.  We have also reproduced the pro forma normalised results for the twelve months to 31 December 201610. The 2016 pro forma results include Everyday Loans and TrustTwo, which were acquired on 13 April 2016, for the twelve months ended 31 December 2016.  Neither the 2017 or 2016 pro forma results include any contribution from George Banco prior to its acquisition on 17 August 2017.

 

Year ended 31 Dec 17

Normalised10

Branch-based lending

Home

credit

 

Guarantor Loans

Central costs

 

NSF plc

normalised


£'000

£'000

£'000

£'000

£'000

Revenue

60,937

50,741

8,078

-

119,756

Other operating income

1,926

-

-

-

1,926

Impairments

 (11,654)

 (15,776)

 (1,365)

-

 (28,795)

Revenue less impairments

51,209

34,965

6,713

-

92,887

Admin expenses

 (28,555)

 (28,679)

 (3,965)

 (4,820)

 (66,019)

Temporary additional commission

-

 (3,184)

-

-

 (3,184)

Operating profit

22,654

3,102

2,748

 (4,820)

23,684

Finance cost

 (7,051)

 (1,299)

 (2,029)

 (102)

 (10,481)

Profit before tax

15,603

1,803

719

 (4,922)

13,203

Taxation

 (3,146)

 88

 (130)

875

 (2,313)

Profit after tax

12,457

1,891

589

 (4,047)

10,890







Normalised earnings per share





3.44p

Dividend per share





2.20p

10 Assuming Everyday Loans (including TrustTwo) was acquired on 1 January 2016 and adjusted to exclude fair value adjustments, amortisation of acquired intangibles and exceptional items.

 

Year ended 31 Dec 16

Pro forma normalised11

Branch-based lending

Home

credit

 

Guarantor Loans

Central costs

 

NSF plc

Pro forma normalised


£'000

£'000

£'000

£'000

£'000

Revenue

50,088

42,170

2,416

-

94,674

Other operating income

450

-

-

-

450

Impairments

(10,484)

(15,313)

(358)

-

(26,155)

Revenue less impairments

40,054

26,857

2,058

-

68,969

Admin expenses

(20,631)

(23,229)

(1,402)

(3,257)

(48,519)

Temporary additional commission

-

(1,771)

-

-

(1,771)

Operating profit

19,423

1,857

656

(3,257)

18,679

Finance cost

(4,720)

(323)

(316)

(264)

(5,623)

Profit before tax

14,703

1,534

340

(3,521)

13,056

Taxation

(2,941)

(54)

(68)

374

(2,688)

Profit after tax

11,762

1,480

272

(3,147)

10,368







Pro forma normalised earnings per share





3.37p

Dividend per share





1.20p

11Assuming Everyday Loans (including TrustTwo) was acquired on 1 January 2016 and adjusted to exclude fair value adjustments, amortisation of acquired intangibles and exceptional items.

 

Divisional overview

Branch-based lending

Everyday Loans is the largest branch-based provider of unsecured loans in the UK's non-standard finance sector.  With 53 branches across the UK, the business ended 2017 with over 47,000 active customers, an increase of 19% over the prior year (2016: 39,600) and a total net loan book of £148.5m, up 21% (2016: £122.4m).

Having made some management changes in May 2017, the business responded with newfound pace and ambition under the leadership of Miles Cresswell-Turner, supported by a strengthened senior management team.  As well as increasing the expectations of what could be achieved, management also delivered against our key operational objectives for the year, including the opening of 12 new branches and the adoption of a new management structure, the introduction of eSignature and Faster Payments, increasing the volume and quality of leads coming into the network and extending our product range.

Network expansion - Our branch opening programme was a key source of growth in 2017, further extending our customer reach as well as increasing our capacity to deliver additional loan book growth.  By meeting our customers face-to-face we are able to build a relationship and improve our understanding of their needs, both of which form key elements of our underwriting process.  Where a customer is unable to attend one of our branches, we may be comfortable to complete the loan by telephone. However, we have no plans to shift away from using our branch network that has proven its ability to deliver strong revenue growth whilst at the same time maintaining a tight control on impairment.

Operational improvements - the introduction of eSignature and Faster Payments during 2017 helped us improve our service to customers through more timely execution.  Having strengthened the senior management team, we also introduced a new structure for the branch network with six new area managers that are responsible for between two and four branches.  This has improved knowledge across the network and increased the sharing of best practice, both of which have contributed to increased conversion and lower impairment.

Increased volumes - Growth is a function of the number and quality of the leads we receive and our ability to convert those leads into loans.  By expanding our capacity with 12 more branches during the year we were able to process more leads from financial brokers, through direct marketing and also from our existing customers.  In 2017 we processed over 1 million leads (2016: 860,000) and converted these into 32,668 loans (2016: 26,535), with an improvement in conversion from new borrowers from 1.97% in 2016 to 2.23% in 2017.

New products - Other drivers of growth include the introduction of new products and in 2017 loan volumes of our new 'Selfy' loan continued to build on the back of an increased number of applications.  The self-employed represent around 15% of the total UK workforce and we plan to grow lending volumes significantly to this large and growing segment of the UK economy.   Our new 12-month loan product was launched in August 2017 and provides branches with an opportunity to offer new customers a 'starter loan', that is typically smaller in size and so allows the customer to prove their ability to manage their repayments before moving on to a larger, longer-term loan.  The success of this new product contributed to a small reduction in average loan size to £3,584 (2016: £3,842).  

Results

Normalised revenue was up 64% to £60.9m (2016: £37.1m) reflecting strong loan book growth as well as the inclusion of Everyday Loans for a full period. Fair value adjustments increased to £11.9m (2016: £7.9m) reflecting a full period of the fair value unwind of the acquired loan portfolio and resulted in reported revenue of £49.1m (2016: £29.2m). Impairments increased to £11.7m (2016: £8.1m) but fell as a percentage of revenue, reflecting our continued focus on quality underwriting and collections.

Administrative expenses increased to 47% of normalised revenue (2016: 40%) reflecting the substantial investment in new branch openings together with the associated costs of recruitment and training. We added 77 new staff during the year taking the total to 307, an increase of 33% versus the prior year. As a result, administration costs increased to £28.6m (2016: £14.7m) and the net impact of all of these movements was that normalised operating profit increased by 53% to £22.7m (2016: £14.8m).  Exceptional costs of £5.3m (2016: nil) related to the refinancing of the Everyday Loans bank facilities and restructuring costs.

Finance costs increased to £7.1m (2016: £2.7m) reflecting the growth in the loan book as well as the increased average cost of the Group's new debt arrangements that were put in place in August 2017.  As a result, normalised profit before tax increased by 29% to £15.6m (2016: £12.1m).

 

 

Year ended 31 December

 

 

2017

Normalised12

 

2017

Fair value adjustments and exceptional items

2017

Reported

 


£'000

£'000

£'000

Revenue

60,937

 (11,874)

49,063

Other operating income

1,926

-

1,926

Impairments

 (11,654)


 (11,654)

Revenue less impairments

51,209

 (11,874)

39,335

Admin expenses

 (28,555)

-

 (28,555)

Operating profit

22,654

(11,874)

10,780

Exceptional items

-

 (5,290)

 (5,290)

Profit before interest and tax

22,654

 (17,164)

5,490

Finance cost

 (7,051)

-

 (7,051)

Profit before tax

15,603

 (17,164)

 (1,561)

Taxation

 (3,146)

3,274

128

Profit after tax

12,457

 (13,890)

 (1,433)

 




 

Year ended 31 December

 

 

2016

Normalised12

 

2016

Fair value adjustments and exceptional items

2016

Reported

 


£'000

£'000

£'000

Revenue

37,080

(7,916)

29,164

Other operating income

450

-

450

Impairments

(8,095)

-

(8,095)

Revenue less impairments

29,435

(7,916)

21,519

Admin expenses

(14,671)

-

(14,671)

Operating profit

14,764

(7,916)

6,848

Exceptional items

-

-

-

Profit before interest and tax

14,764

(7,916)

6,848

Finance cost

(2,699)

-

(2,699)

Profit before tax

12,065

(7,916)

4,149

Taxation

(2,540)

1,504

(1,036)

Profit after tax

9,525

(6,412)

3,113

 




12 Reported figures, adjusted to exclude fair value adjustments

Key performance indicators

A modest increase in revenue yield to 45.8% (2016: 44.2%) reflected a small shift in business mix together with the flow-through effect of pricing changes from the previous trading period. Impairments at 19.1% of revenue (2016: 21.0%) reflected the quality of our underwriting process as well as our continued focus on delinquency. The net result was that the risk adjusted margin increased to 37.0% (2016: 35.1%).  Operating profit margin fell slightly to 37.2% (2016: 38.8%) reflecting the significant investment in new branches during the year however the return on assets was broadly unchanged at 17.0% (2016: 17.1%).

 

 

Year ended 31 December

 

Key Performance Indicators13

2017

Normalised

 

2016

Normalised

 

Number of branches

53

41

Period end customer numbers (000)

47.0

39.6

Period end loan book (£m)14

148.5

122.4

Average loan book (£m)15

133.0

113.4

Revenue yield (%)16

45.8

44.2

Risk adjusted margin (%)17

37.0

35.1

Impairments/revenue (%)

19.1

21.0

Impairment/average loan book (%)

8.8

8.8

Operating profit margin (%)

37.2

38.8

Return on asset (%)18

17.0

17.1

13                    Assuming Everyday Loans was acquired on 1 January 2016 and adjusted to exclude fair value adjustments

14                    Excluding fair value adjustments

15                    Excluding fair value adjustments based on a twelve month average

16                    Revenue as a percentage of average loan book excluding fair value adjustments (twelve month average)

17                    Revenue less impairments as a percentage of average loan book excluding fair value adjustments (twelve month average)

18 Operating profit as a percentage of average loan book excluding fair value adjustments (twelve month average)

 

Plans for 2018

We remain focused on driving loan book growth through increased volumes and better conversion, all whilst maintaining a tight control on impairment.  This will be underpinned by the following initiatives in 2018:

Branch openings - we are on-track to open a further 12 locations in the first half of 2018 and have already opened new branches in Dudley, King's Heath and Bootle.  Ten out of the twelve new branch managers are internal promotions, helping to mitigate operational risk when opening a number of branches in a short space of time.  The 37 new staff required were recruited in January 2018 and underwent an intensive training programme before being deployed across the network and ahead of joining their new branches.  As previously announced, we expect this expansion to incur an additional £3m of costs in 2018 including the costs of new staff, training and premises.

Active lead management by channel - with over one million leads processed in 2017, we are actively reviewing all acquisition channels in order to ensure we maintain lead quality as well as volume and also manage carefully our customer acquisition costs. 

Product development - We remain optimistic about our new Selfy and 12-month products and continue to explore the potential for additional loan products that can be tailored to our customers' circumstances.

Extending our relationship with customers - as well as attracting new customers every month, we also plan to improve our retention of existing customers, especially those that have performed well.  With an established relationship in place, such customers tend to be lower risk and so can attract lower APRs, meaning we can improve our pricing for a better customer outcome.

Building on the momentum achieved in 2017, we plan to continue to grow our loan book at 20% or more and fully expect to achieve our target of a 20% return on assets in due course.

 

Home credit

Loans at Home received its full permissions from the FCA in May 2017 and is the third largest home credit business in the UK with over 104,000 customers (2016: 93,600) and a net loan book at 31 December 2017 of £51.2m, an increase of 53% over the prior year (2016: £33.4m). 

The announcement of a major restructuring at the market leader in February 2017 prompted a large number of highly experienced agents and staff to approach us, keen to continue working in home credit, but preferring our operating model of a network of self-employed agents rather than employed customer experience managers.  Recognising the significant opportunity this presented, we quickly established a rigorous on-boarding process including the development of an individual business plan for each agent which projected their expected weekly performance from their anticipated start date until the end of 2017. Once agreed, we committed to provide them with temporary additional commission to help support them financially as they built up their customer rounds over the coming months. 

Having added 229 agents in the first half of 2017, by 31 December 2017 this had increased to 442 and our total number of agents had increased to 1,005, an increase of 28% (2016: 785).  To accommodate this expansion we opened 22 new offices and added over 100 staff, at a variety of levels, including 55 new business managers and 23 new area managers, thereby maintaining an effective span of control with six agents per business manager and three business managers per area manager.  While this required a sizeable investment in infrastructure and temporary additional commission totalling £5.3m, it also delivered substantial loan book growth and improved the quality of our customer base - at 31 December 2017 the number of quality customers, who had paid 70% or more of their due payments over the previous 13 weeks, had increased to 66,000 or 64% of the total (2016: 53%).

We rolled-out our collections app for agents in February 2017 and our lending app became fully operational during the fourth quarter of 2017.  Both have been well-received by agents, removing the need for a paper-based process.  They also provide managers with real-time performance data by customer and agent so that any issues can be quickly identified and acted upon.  An additional advantage is that we now have a digital audit trail of lending and collecting and can easily perform quality assurance reviews on individual agents and customers.

Results

While 2017 normalised revenue of £50.7m (2016: £42.2m) was the same as reported revenue, in 2016 reported revenue was £0.4m lower than the normalised figure due to the final unwinding of the fair value adjustment made to the carrying value of the loan book at acquisition in 2015.

Capitalising upon the considerable opportunity presented by the restructuring of a major competitor, we invested a total of £5.3m during the year comprising £3.2m in temporary agent commission (2016: £1.8m) and an additional £2.1m of additional staff, training and premises costs (2016: nil).  Normalised operating profit before temporary additional commission increased by 75% to £6.3m (2016: £3.6m).  The new agents that joined our network received temporary additional commission while they built up their customer numbers and the level of income earned through our normal commission structure.  The exceptional number of new agents added in 2017 meant that the total amount of additional commission was considerably higher than had been expected at the start of the year.  Normalised operating profit after these costs was £3.1m (2016: £1.9m).

Exceptional costs of £0.5m related to the refinancing of the Loans at Home bank facility.  Finance costs increased to £1.3m (2016: £0.3m), reflecting the strong loan book growth as well as the increased cost of funds of the Group's new long-term debt arrangements.  Before £3.2m of temporary additional commission (2016: £1.8m), profit before interest and tax increased to £6.3m (2016: £3.6m).  After deducting these costs normalised profit before tax was up 20% to £1.8m (2016: £1.5m).

 

Year ended 31 December

2017

Normalised before temporary additional commission

2017

Temporary additional commission

2017

Normalised19

2017

Fair value adjustments and exceptional items

2017

Reported


£'000

£'000

£'000

£'000

£'000

Revenue

50,741

-

50,741

-

50,741

Impairments

 (15,776)

 -

 (15,776)

-

 (15,776)

Revenue less impairments

34,965

-

34,965

-

34,965

Admin expenses

 (28,679)

 (3,184)

 (31,863)

-

 (26,545)

Operating profit

6,286

(3,184)

3,102

-

3,102

Exceptional items

-

-

-

 (467)

 (467)

Profit before interest and tax

6,286

(3,184)

3,102

 (467)

2,635

Finance cost

 (1,299)

 -

 (1,299)

-

 (1,299)

Profit before tax

4,987

(3,184)

1,803

 (467)

1,336

Taxation

(525)

613

88

91

 179

Profit after tax

4,462

(2,571)

1,891

 (376)

1,515







19 Reported figures, adjusted to exclude fair value adjustments

 

 

 

 

Period ended 31 December

2016

Normalised before temporary additional commission

2016

Temporary additional commission

2016

Normalised

2016

Fair value adjustments and exceptional items

2016

Reported


£'000

£'000

£'000

£'000

£'000

Revenue

42,170

-

42,170

(426)

41,744

Impairments

(15,313)

-

(15,313)

-

(15,313)

Revenue less impairments

26,857

-

26,857

(426)

26,431

Admin expenses

(23,229)

(1,771)

(25,000)

-

(23,229)

Operating profit/(loss)

3,628

(1,771)

1,857

(426)

1,431

Exceptional items

-

-

-

-

-

Profit before interest and tax

3,628

(1,771)

1,857

(426)

1,431

Finance cost

(323)

-

(323)

-

(323)

Profit/(loss) before tax

3,305

(1,771)

1,534

(426)

1,108

Taxation

(395)

341

(54)

81

27

Profit/(loss) after tax

2,910

(1,430)

1,480

(345)

1,135







 

Key performance indicators

The significant growth in our agent network had a knock-on effect on all of our KPIs.  The increased number of customers taking out larger, longer-term loans meant that revenue yield reduced slightly to 147%.  However, the increased quality of our loan book and strong collections performance of the recently joined agents is reflected in the marked reduction in impairment that fell to 31.1% of revenue (2016: 36.3%), in line with our previous guidance. Operating profit margins of 6.1% (2016: 4.4%) reflect the £5.3m additional investment (£3.2m of temporary additional commission and £2.1m of other expansion related costs) made in 2017.  Before these expenses operating margin was 16.6% (2016: 8.6%) and return on asset was 24.4% (2016: 13.1%).

 

Year ended 31 December

 

Key Performance Indicators20

2017

Normalised

 

2016

Normalised

 

 

Period end agent numbers



1,005

785

Period end number of offices



69

47

Period end customer numbers (000)



104.1

93.6

Period end loan book (£m)



51.2

33.4

Average loan book (£m)



34.5

27.6

Revenue yield (%)



147.0

152.8

Risk adjusted margin (%)



101.3

97.3

Impairments/revenue (%)



31.1

36.3

Impairment/average loan book (%)



45.7

55.5

Operating profit margin (%)



6.1

4.4

Return on asset (%)



9.1

6.7

20 All definitions are as per above.

 

Plans for 2018

Having invested in our infrastructure and grown our net loan book by 53%, our network of self-employed agents by 28% and our number of staff by 26% in 2017, we now have an excellent platform to deliver further growth in 2018, albeit at a more measured pace than in 2017.  With a strong management team in place, we will seek to bed in all of the changes made over the past 12 months and in particular, we will focus on:

Maintaining our focus on delivering great outcomes for our customers - if we fall short on this objective then we will not be able to grow and sustain our business.

Completing the integration of recently joined agents - as each of our new agents reaches their target number of customers so we can then remove the need for temporary additional commission.

Augmenting our hand-held technology further - we will continue to develop new applications for agents in the field and additional management information to help increase operational efficiency.

Maintaining a tight span of control - whilst new technology and improved management information might present an opportunity to relax the current spans of control at some point in the future, we plan to maintain these at current levels in 2018 whilst we continue to grow..

Selectively expanding our network - we will look to add more agents and field staff but only on a highly selective basis to ensure that any additions are profitable in 2018.

Continuing to improve the quality of our customer base - whilst we believe that there remains a significant opportunity for loan book growth, we are determined that this will not be at the expense of quality.  We will continue to improve our underwriting and collections performance through the further deployment of behavioural scoring as well as through access to third-party datasets as they become available.

Each of these initiatives should help us to continue to drive loan book growth, albeit at a slower pace than in 2017, and we still plan to achieve 20% per annum while maintaining a tight grip on impairment.

Guarantor Loans

The acquisition of George Banco on 17 August 2017 transformed our guarantor loans business that is now the clear number two in the UK market.  Marc Howells, the CEO of George Banco, was appointed Managing Director of the newly named Guarantor Loans Division that now has a clearly defined management structure and in its first few months as a combined business has delivered strong growth in loan book, revenue and profit.

By retaining both the TrustTwo and George Banco brands, we are able to address complementary segments of the market, offering different customer journeys through different channels, but with a common underwriting approach.  While TrustTwo is focused on price comparison websites and the direct channel, George Banco specialises in capturing leads from the financial broker community.

We announced our receipt of full authorisation from the FCA for George Banco on 28 September 2017 and completed our 100-day plan for the enlarged business on schedule. Having been held back by funding constraints prior to acquisition, George Banco quickly returned to its previous levels of lending and TrustTwo responded positively to the change of leadership.  As a result, the division reached record volumes in November and December 2017 and risk adjusted margin was over 30%.

Despite growing quickly, both brands continue to deliver great outcomes for our customers and score well on customer review websites such as Trustpilot.com and Feefo.com.

 

Results

The reported results for 2017 include a full period of TrustTwo and four and a half months' of George Banco that was acquired on 17 August 2017.  The figures for 2016 comprise TrustTwo only from its acquisition on 13 April 2016 and there were no differences between normalised and reported results in 2016. 

As at 31 December 2017, the division had a net loan book of £47.9m (2016: £8.8m).  The significant contribution from George Banco meant that normalised revenue increased to £8.1m (2016: £1.8m) and normalised operating profit to £2.7m (2016: £0.5m). 

Increased finance costs of £2.0m (2016: £0.2m) reflected both the strong loan book growth in the year as well as the terms of the new debt arrangements that were put in place at the time of the George Banco acquisition.  As a result normalised profit before tax more than doubled to £0.7m (2016: £0.3m).

Exceptional items of £0.2m (2016: nil) comprised stamp duty on the purchase of George Banco and reorganisation costs post-completion with the result that reported profit before tax was up 33% to £0.4m (2016: £0.3m).

 

 

Year ended 31 December

 

 

2017

Normalised21

 

Fair value adjustments and exceptional items

2017

Reported

£000

2016

Reported

£000


£'000

£'000

£'000

£'000

Revenue

8,078

 (111)

7,967

1,849

Impairments

 (1,365)

-

 (1,365)

(243)

Revenue less cost of sales

6,713

 (111)

6,602

1,606

Admin expenses

 (3,965)

-

 (3,965)

(1,146)

Operating profit

2,748

 (111)

2,637

460

Exceptional items

-

 (230)

 (230)

-

Profit before interest and tax

2,748

 (341)

2,407

460

Finance cost

 (2,029)

-

 (2,029)

(198)

Profit before tax

719

 (341)

378

262

Taxation

 (130)

65

 (65)

(58)

Profit after tax

589

 (276)

313

204






21 Reported figures, adjusted to exclude fair value adjustments and exceptional items

 

Key performance indicators

All of the KPIs were transformed by the acquisition of George Banco.  The 2017 KPIs include George Banco for a full 12 months while the 2016 KPIs only reflect 12 months of TrustTwo emphasising the significant impact of George Banco on the division.  In particular the differential in pricing between George Banco and TrustTwo lifted revenue yield and also drove risk adjusted margin which was over 30% in 2017.  Rates of impairment remained within our target range and while return on asset is below our target of 20%, we remain confident that this can be reached as the business continues to grow strongly.

 

Year ended 31 December

 

Key Performance Indicators22

2017

Normalised

 

2016

Normalised

 

 

 

Period end customer numbers (000)

17.4

3.3

 

Period end loan book (£m)

48.2

8.8

 

Average loan book (£m)

40.4

7.7

 

Revenue yield (%)

35.8

31.9

 

Risk adjusted margin (%)

30.3

26.7

 

Impairment/revenue (%)

15.3

14.8

 

Impairment/average loan book (%)

5.5

4.6

 

Operating profit margin (%)

37.3

27.2

 

Return on asset (%)

13.4

8.5

22                    2016 KPIs assume TrustTwo was acquired on 1 January 2016. 2017 KPIs assume George Banco was acquired on 1 January 2017.  Revenue for the full year was £14.5m (2016: £2.4m) and operating profit was £5.4m (2016:£0.8m). All definitions are as per above. 

 

Plans for 2018

There are a number of initiatives underway for 2018 including:

Move to a single loan management platform - this significant project is our number one priority in 2018. The project is well underway and we expect it to be complete before the end of the current year.  Benefits include improved management information, reduced reliance on third parties and scale economies.

Development of a more tailored customer journey - our objective is to be able to identify the best customer journey for an individual applicant depending upon a range of criteria including size of loan asked for, income, credit score and application channel. We are developing this capability in parallel with our move to a single loan management platform.

Maintain a well-balanced channel mix - whilst keen to capitalise on our strengths in order to drive down customer acquisition costs, we will also continue to diversify our acquisition channels and seek to increase significantly the volume of branch referrals from Everyday Loans as this represents a unique source of high quality traffic for the division.

Common underwriting approach - we are moving to a unified approach, one that will enable more dynamic, risk-based pricing and which should expand our customer reach.

Harmonised collections - where we have been unable to contact or take a payment from a customer for some time, we plan to move such loans into a centralised collections function, one that pools the division's expertise and ensures a consistent approach and to free-up capacity.

 

We are excited about the prospects for our Guarantor Loans Division and given our strong position in the market we remain confident of being able to meet our target of 20% annual loan book growth and a 20% return on assets.

 

Central costs

 

Year ended 31 December


2017

Normalised23

2017

Amortisation of acquired intangibles and exceptional items

2017

Reported



£'000

£'000

£'000

Revenue


-

-

-

Admin expenses


 (4,820)

 (7,897)

 (12,717)

Operating loss


 (4,820)

 (7,897)

 (12,717)

Exceptional items


-

 (355)

 (355)

Loss before interest and tax


 (4,820)

 (8,252)

 (13,072)

Finance cost


 (102)

-

 (102)

Loss before tax


 (4,922)

 (8,252)

 (13,174)

Taxation


875

1,569

2,444

Loss after tax


 (4,047)

 (6,683)

 (10,730)






23 Adjusted to exclude the amortisation of acquired intangibles related to the acquisition of Loans at Home, Everyday Loans, George Banco and exceptional items

 

Period ended 31 December


2016

Normalised24

2016

Amortisation of acquired intangibles and exceptional items

2016

Reported



£'000

£'000

£'000

Revenue


-

-

-

Admin expenses


(3,257)

(10,714)

(13,971)

Operating loss


(3,257)

(10,714)

(13,971)

Exceptional items


-

(626)

(626)

Loss before interest and tax


(3,257)

(11,340)

(14,597)

Finance cost


(264)

-

(264)

Loss before tax


(3,521)

(11,340)

(14,861)

Taxation


374

2,037

2,411

Loss after tax


(3,147)

(9,303)

(12,450)






24 Adjusted to exclude the amortisation of acquired intangibles related to the acquisition of Loans at Home and Everyday Loans and exceptional items

Normalised administrative expenses increased to £4.8m (2016: £3.3m), reflecting growth in the scale of the Group and includes the accrual of bonus payments to Executive Directors (none having been paid in 2016) and a full year of costs relating to certain head office staff who were recruited during 2016. The amortisation of acquired intangible assets fell to £7.9m (2016: £10.7m) reflecting a reduced charge for Loans at Home, a full period of amortisation for Everyday Loans and a small charge relating to George Banco. Finance costs of £0.1m (2016: £0.3m) related to the amortisation of fees capitalised on the prior year fund raising while the £0.4m exceptional charge comprised acquisition costs together with the write-off of the remaining balance of capitalised fees referred to above. The prior year exceptional charge of £0.6m related to stamp duty paid on the acquisition of Everyday Loans. Stamp duty on the acquisition of George Banco in the current year is included in exceptional costs of Everyday Loans.

 

IFRS 9

The International Accounting Standard Board's introduction of a new accounting standard covering financial instruments became effective for accounting periods beginning on or after 1 January 2018.  This standard replaces IAS39: Financial Instruments: Recognition and Measurement. 

The new standard requires that lenders (i) provide for the Expected Credit Loss ('ECL') from performing assets over the following year and (ii) provide for the ECL over the life of the asset where that asset has seen a significant deterioration in credit risk.  As a result, whilst the underlying cash flows from the asset are unchanged, IFRS9 will have the effect of bringing forward provisions into earlier accounting periods. This will result in a one-off adjustment to receivables, deferred tax and reserves on adoption and will result in delayed recognition of profits.

To assist analysts and investors and in order to provide some illustrative guidance on the potential impact on future reporting periods, set out below is an estimate of the impact on the closing balance sheet for 2017 and the potential impact on the full year income statement in 2017, assuming IFRS9 had been adopted for the full accounting period ending 31 December 2017.  

 

IFRS 9 Income statement

IAS 39

 

£m

IFRS9
adjustment

£m

IFRS9

 

£m

Normalised operating profit:8




- Branch-based lending

22.7

(1.3)

21.4

- Home credit

6.3

(4.4)

1.9

- Guarantor loans

2.7

(0.3)

2.4

- Central costs

(4.8)

-

(4.8)

Adjusted normalised operating profit

26.9

(6.0)

20.9

 

IFRS 9 balance sheet

IAS 39

 

£m

IFRS9
adjustment

£m

IFRS9

 

£m

Receivables:9




- Branch-based lending

148.5

(1.7)

146.8

- Home credit

51.2

(10.6)

40.6

- Guarantor loans

48.2

(0.9)

47.3

Total receivables

247.9

(13.2)

234.7

Other

(14.7)

2.5

(12.2)

 

Net assets

233.2

(10.7)

222.5

8 Adjusted to exclude temporary additional commission, fair value adjustments, the amortisation of acquired intangibles and exceptional items

9 Adjusted to exclude fair value adjustments

 

The adoption of IFRS 9 results in an unaudited reduction in receivables of £13.2m at 31 December 2017, which net of deferred tax, results in an unaudited reduction in net assets of £10.7m. Whilst the particularly strong loan book growth in home credit means that experiences the largest adjustment to receivables, net assets and earnings, it is important to note that cash flow remains unchanged and IFRS 9 only changes the timing of profits made on a loan.

There will be no change to the Group's underwriting process and our scorecards will be unaffected by the change in accounting. The ultimate profitability of a loan is the same under both IAS 39 and IFRS 9 and the cash flows and capital generation over the life of a loan remain unchanged. The calculation of the Group's debt covenants are unaffected by IFRS 9, as they are based on accounting standards in place at the time they were set.

 

Principal risks

Save for the addition of cyber risk (see below), the principal risks facing the Group, together with the Group's risk management process in relation to these risks, are unchanged from those reported in the Group's Annual Report for the period ended 31 December 2016 (which is available for download at http://www.nsfgroupplc.com).  The principal risks are:

 

§  Conduct - risk of poor outcomes for our customers or other key stakeholders as a result of the Group's actions;

 

§  Regulation - risk through changes to regulations or a failure to comply with existing rules and regulations;

 

§  Credit - risk of loss through poor underwriting or a diminution in the credit quality of the Group's customers;

 

§  Business strategy and operations - risk that the Group fails to execute its plan, including the integration of George Banco, as expected or that the outcome from executing such strategy is not as planned;

 

§  Cyber risk - increased connectivity in the workplace coupled with the increasing importance of data and data analytics in operating and managing consumer finance businesses means that this risk has been identified separately from operational risk;

 

§  Liquidity - while the Group is well-capitalised and has secured committed, six-year debt facilities for £225m and a revolving credit facility for a further £35m, prevailing uncertainty in global financial markets means that there is a risk that the Group may be unable to secure sufficient finance in the future to execute its long-term business strategy; and

 

§ Reputation - a failure to manage one or more of the risks above may damage the reputation of the Group or any of its subsidiaries that in turn may materially impact the future operational and/or financial performance of the Group.

 

 

On behalf of the Board of Directors

 

Nick Teunon

Chief Financial Officer

13 March 2018

 

Consolidated statement of comprehensive income

For the year ended 31 December 2017

 


Note


Before fair value adjustments, amortisation of acquired intangibles and exceptional items

 

£'000

Fair value adjustments, amortisation of acquired intangibles and exceptional items

 

 £'000

Year ended

31 December

 2017

 

 

 

 

£'000

Revenue

2


119,756

(11,985)

107,771

Other operating income



1,926

-

1,926

Impairment



(28,795)

-

(28,795)

Administrative expenses



(69,203)

(7,897)

(77,100)

Operating profit

3


23,684

(19,882)

3,802

Exceptional items



-

(6,342)

(6,342)

Profit/(loss) on ordinary activities before interest and tax



23,684

(26,224)

(2,540)

Finance cost



(10,481)

-

(10,481)

Profit/(loss) on ordinary activities before tax



13,203

(26,224)

(13,021)

Tax on profit/(loss) on ordinary activities

5


(2,313)

4,999

2,686

Profit/(loss) for the year



10,890

(21,225)

(10,335)

Total comprehensive loss for the year





(10,335)

 

Loss attributable to:






- Owners of the parent





(10,335)

- Non-controlling interests





-

 

Loss per share


Note


Year ended

31 Dec 2017

 
Pence

Basic and diluted

6


(3.26)

 

There are no recognised gains or losses other than disclosed above and there have been no discontinued activities in the year.

 

 For the period ended 31 December 2016

 


Note


Before fair value adjustments, amortisation of acquired intangibles and exceptional items

 £'000

Fair value adjustments, amortisation of acquired intangibles and exceptional items

 £'000

Year ended

31 December

2016

 

 

 

 

 £'000

Revenue

2


81,099

(8,342)

72,757




450

-

450

Impairment/cost of sales



(23,651)

-

(23,651)

Administrative expenses



(44,074)

(10,714)

(54,788)

Operating loss

3


13,824

(19,056)

(5,232)

Exceptional items



-

(626)

(626)

Loss on ordinary activities before interest and tax



13,824

(19,682)

(5,858)

Finance cost



(3,484)

-

(3,484)

Loss on ordinary activities before tax



10,340

(19,682)

(9,342)

Tax on loss on ordinary activities

5


(2,278)

3,622

1,344

Profit/(loss) for the year



8,062

(16,060)

(7,998)

Total comprehensive loss for the year





(7,998)

 

Loss attributable to:






- Owners of the parent





(7,998)

- Non-controlling interests





-

 

 

Loss per share


Note


Year ended 31 Dec 2016
Pence

Basic and diluted

6


(2.60)

 

 

Consolidated statement of financial position

As at 31 December 2017

 


Note

31 Dec 2017

£'000

31 Dec 2016

£'000

ASSETS




Non-current assets




Goodwill

8

140,668

132,070

Intangible assets

9

17,205

17,412

Property, plant and equipment


9,434

5,459



167,307

154,941

Current assets




Amounts receivable from customers

10

259,836

180,413

Trade and other receivables


9,811

9,709

Cash and cash equivalents


10,954

5,215



280,601

195,337

Total assets


447,908

350,278

LIABILITIES AND EQUITY




Current liabilities




Trade and other payables


10,353

8,005

Total current liabilities


10,353

8,005

Non-current liabilities




Deferred tax liability

11

4,996

5,890

Bank loans


199,316

87,300

Total non-current liabilities


204,312

93,190

Equity




Share capital

13

15,852

15,852

Share premium

13

254,995

254,995

Other reserves


(1,066)

-

Retained loss


(36,793)

(22,019)



232,988

248,828

Non-controlling interests


255

255

Total equity


233,243

249,083

Total equity and liabilities


447,908

350,278

 

 

Consolidated statement of changes in equity

For the year ended 31 December 2017

 


Note

Share

capital

£'000

Share

premium

£'000

Other

reserves

£'000

Retained

loss

£'000

Non-controlling interest

£'000

Total

£'000

At 31 December 2015


5,264

92,714

-

(13,070)

255

85,163

Total comprehensive loss for the year


-

-

-

(7,998)

-

(7,998)

Transactions with owners, recorded directly in equity:

Dividends paid

7

-

-

-

(951)

-

(951)

Issue of shares

13

10,588

162,281

-

-

-

172,869

 At 31 December 2016


15,852

254,995

-

(22,019)

255

249,083

Total comprehensive loss for the year


-

-

-

(10,335)

-

(10,335)

 

Transactions with owners, recorded directly in equity:

 

Dividends paid

7

-

-

-

(4,439)

-

(4,439)

Credit to equity for equity-settled share based payments


-

-

291

-

-

291

Purchase of own shares


-

-

(1,357)

-

-

(1,357)

 At 31 December 2017


15,852

254,995

(1,066)

(36,793)

255

233,243

 

Consolidated statement of cash flows

For the year ended 31 December 2017


Note

Year ended

31 Dec 2017
£'000

Year ended

31 Dec 2016
£'000

Net cash used in operating activities

14

(37,000)

(23,541)

Cash flows from investing activities




Purchase of property, plant and equipment


(5,536)

(4,327)

Proceeds from sale of property, plant and equipment


605

813

Acquisition of subsidiary

12

(16,442)

(230,784)

Net cash used in investing activities


(21,373)

(234,298)

 

Cash flows from financing activities




Finance cost


(7,974)

(3,484)

New bank loan raised


77,882

87,300

Dividends paid


(4,439)

(951)

Purchase of own shares


(1,357)

-

Proceeds from issue of share capital


-

172,869

Net cash from financing activities


64,112

255,734





Net increase/(decrease) in cash and cash equivalents


5,739

(2,105)

Cash and cash equivalents at beginning of year


5,215

7,320

Cash and cash equivalents at end of year


10,954

5,215

 

As at 31 December 2017 the Group had cash of £11.0m (2016: £5.2m) with gross debt of £208.1m (2016: £87.3m). This cash balance reflects the acquisition of George Banco and associated fundraising for the acquisition together with the trading activities of the Group during the year. The year-end cash balance also reflects the seasonal peak in lending that takes place in December at Loans at Home which reduces cash at 31 December, but subsequently increases in the weeks following the year end.

 

 

Unaudited notes to the preliminary announcement

 

1. Basis of preparation

 

The financial information set out in the announcement does not constitute the company's statutory accounts for the years ended 31 December 2017 or 2016. The financial information for the year ended 31 December 2016 is derived from the statutory accounts for that year which have been delivered to the Registrar of Companies. The auditors reported on those accounts: their report was unqualified, did not draw attention to any matters by way of emphasis and did not contain a statement under s498(2) or (3) of the Companies Act 2006.

The audit of the statutory accounts for the year ended 31 December 2017 is not yet complete. These accounts will be finalised on the basis of the financial information presented by the directors in this preliminary announcement and will be delivered to the Registrar of Companies following the company's annual general meeting.

 

The preliminary announcement has been agreed with the Company's auditor for release.

 

2. Revenue

 

Revenue is recognised by applying the effective interest rate ('EIR') to the carrying value of a loan. The EIR is calculated at inception and represents the rate which exactly discounts the future contractual cash receipts from a loan to the amount of cash advanced under the loan, plus directly attributable issue costs. In addition, the EIR takes account of customers repaying early.


Year ended

31 Dec 2017

£'000

Year ended

31 Dec 2016
 £'000

Interest income

119,756

81,099

Fair value unwind on acquired loan portfolio

(11,985)

(8,342)

Total revenue

107,771

72,757

 

3. Operating profit/(loss) for the year is stated after charging/(crediting):

 


Year ended

31 Dec 2017

£'000

Year ended

31 Dec 2016
 £'000

Depreciation of property, plant and equipment

1,497

690

Amortisation of intangible assets

7,897

10,714

Staff costs

32,899

20,287

Rentals under operating leases

1,926

1,110

Profit on sale of property, plant and equipment

(416)

(363)

Rentals received under operating leases

-

(28)

 

 

4. Segment information

 

Management has determined the operating segments by considering the financial and operational information that is reported internally to the chief operating decision maker, the Board of Directors, by management. For management purposes, the Group is currently organised into four operating segments branch-based lending (Everyday Loans), home credit (Loans at Home), guarantor loans (TrustTwo and George Banco), and Central (head office activities). The Group's operations are all located in the United Kingdom and all revenue is attributable to customers in the United Kingdom.

 


Branch-based lending

£'000

Home

credit

£'000

Guarantor Loans1

£'000

Central

£'000


2017 Total

£'000

Year ended 31 December 2017







Interest income

60,937

50,741

8,078

-


119,756

Fair value unwind on acquired loan portfolio

(11,874)

-

(111)

-


(11,985)

Total revenue

49,063

50,741

7,967

-


107,771

Operating profit/(loss) before amortisation

10,780

3,102

2,637

(4,820)


11,699

Amortisation of intangible assets

-

-

-

(7,897)


(7,897)

Operating (loss)/profit before exceptional items

10,780

3,102

2,637

(12,717)


3,802

Exceptional items2

(5,290)

(467)

(230)

(355)


(6,342)

Finance cost

(7,051)

(1,299)

(2,029)

(102)


(10,481)

(Loss)/profit before taxation

(1,561)

1,336

378

(13,174)


(13,021)

Taxation

128

179

(65)

2,444


2,686

(Loss)/profit for the year

(1,433)

1,515

313

(10,730)


(10,335)









Branch-based lending

£'000

Home

credit

£'000

Guarantor Loans1

£'000

Central

£'000

Consolidation adjustments3

£'000

2017 Total

£'000

Total assets

181,962

62,736

50,819

274,200

(121,809)

447,908

Total liabilities

(135,837)

(35,550)

(39,059)

(1,615)

(2,604)

(214,665)

Net assets

46,125

27,186

11,760

272,585

(124,413)

233,243

 

Capital expenditure

 

2,474

 

3,012

 

32

 

18

 

-

 

5,536

Depreciation of plant, property and equipment

617

798

29

53

-

1,497

Amortisation of intangible assets

-

-

-

7,897

-

7,897

1 Guarantor Loans division includes George Banco and TrustTwo. TrustTwo is supported by the infrastructure of Everyday Loans but its results are reported to the Board separately and have therefore been disclosed within the Guarantor Loans Division above.

2 Exceptional items in 2017 comprise £4.5m related to the refinancing of the Group's debt facilities, £1.0m relating to merger and acquisition activities, and £0.9m related to restructuring during the year.

3 Consolidation adjustments include the acquisition intangibles of £17.2m (2016: £17.4m), goodwill of £140.7 m (2016: £132.1m), deferred tax liability of £4.9m (2016: £6.8m), fair value of loan book of £12.0m (2016: £15.8m) and the elimination of intra-group balances.

 

The results of each segment have been prepared using accounting policies consistent with those of the Group as a whole.

 

Year ended 31 December 2016

Branch-based lending

£'000

Home

credit

£'000

Guarantor
Loans1

£'000

Central

£'000


2016 Total

£'000

 

Interest income

37,080

42,170

1,849

-


81,099

 

Fair value unwind on acquired loan portfolio

(7,916)

(426)

-

-


(8,342)

 

Total revenue

29,164

41,744

1,849

-


72,757

 

 

Operating profit/(loss) before amortisation

6,848

 

1,431

460

 

(3,257)


5,482

 

Amortisation of intangible assets

-

-

-

(10,714)


(10,714)

 

Operating profit/(loss) before exceptional items

6,848

1,431

460

(13,971)


(5,232)

 

Exceptional items

-

-

-

(626)


(626)

 

Finance cost

(2,699)

(323)

(198)

(264)


(3,484)

 

Profit/(loss) before taxation

4,149

1,108

262

(14,861)


(9,342)

 

Taxation

(1,036)

27

(58)

2,411


1,344

 

Profit/(loss) for the year

3,113

1,135

204

(12,450)


(7,998)

 









Branch-based lending

£'000

Home

credit

£'000

Guarantor Loans1

£'000

Central

£'000

Consolidation adjustments2

£'000

2016 Total

£'000

Total assets

136,362

40,258

8,783

274,883

(108,964)

351,322

Total liabilities

(98,589)

(14,239)

-

(1,595)

12,184

(102,239)

Net assets

37,773

26,019

8,783

273,288

(96,780)

249,083

 

Capital expenditure

 

1,764

 

2,386

 

-

 

177

 

-

 

4,327

Depreciation of plant, property and equipment

226

425

-

39

-

690

Amortisation of intangible assets

-

-

-

10,714

-

10,714

 

5. Taxation

 

Current tax charge/(credit)



In respect of the current year

673

2,103

Total current tax charge

673

2,103

Deferred tax credit

(3,359)

(3,447)

Total tax credit

(2,686)

(1,344)

 

The difference between the total tax expense shown above and the amount calculated by applying the standard rate of UK corporation tax to the profit before tax is as follows:

 

 

Loss before taxation

(13,021)

(9,342)




Tax on loss on ordinary activities at standard rate of UK corporation tax of 19.25%
(2016: 20%):

(2,507)

(1,868)

Effects of:



Fixed asset differences

(38)

(103)

Expenses not allowable for taxation

199

132

Share based payments

11

-

Chargeable gains/losses

33

99

Adjustment to tax charge in respect of previous periods

(573)

72

Adjustment to tax charge in respect of previous periods - deferred tax

176

(80)

Deferred tax rate change

60

254

Changes in unrecognised deferred tax

(142)

151

Deferred tax not previously recognised

95

-

Total tax credit

(2,686)

(1,344)

 

Exceptional items and costs related to long-term incentive plans are included within 'expenses not allowable for taxation' due the nature of the transactions. Exceptional items disallowed include costs in relation to the acquisition of George Banco totalling £0.6m (2016: £0.6m in relation to the acquisition of Everyday Loans). Other disallowed items include set up costs and the fair value of the long-term incentive schemes at the date of grant totalling £0.4m (2016: £nil).

 

Reductions in the UK corporation tax rate from 20% to 19% (effective from 1 April 2017) were substantively enacted on 26 October 2015. A further reduction in the rate from 19% to 17% (effective from 1 April 2020) was substantively enacted on 6 September 2016.  This will reduce the company's future current tax charge accordingly. The deferred tax liability at 31 December 2017 has been calculated based on the rate of 19% substantively enacted at the balance sheet date.

 

6. Loss per share

 


Retained loss attributable to Ordinary Shareholders (£'000)

(10,335)

(7,998)

Weighted average number of Ordinary Shares at year ended 31 December

316,901,254

307,315,588

Basic and diluted loss per share (pence)

(3.26p)

(2.60p)

 

The loss per share was calculated on the basis of net loss attributable to Ordinary Shareholders divided by the weighted average number of Ordinary Shares. The weighted average number of shares of 316,901,254 reflects the repurchase of 1,868,135 shares during 2017 that are now held in treasury. The basic and diluted loss per share is the same, as the exercise of share options would reduce the loss per share and is anti-dilutive.

Weighted average number of potential Ordinary Shares that are not currently dilutive

8,728

5,539

 

The weighted average number of potential Ordinary shares that are not currently dilutive includes the ordinary shares that the Company may potentially issue relating to its share option schemes and share awards under the Group's long-term incentive plans and Save As You Earn schemes. The amount is based upon the number of shares that would be issued if 31 December 2017 was the end of the contingency period.

 

7. Dividends

 

A half-year dividend of 0.5p per share was paid in August 2017 (2016: 0.3p). The Directors have recommended a final dividend in respect of the year ended 31 December 2017 of 1.70 pence per share (31 December 2016: 0.9 pence per share) which will amount to an estimated final dividend payment of £5.4m. This final dividend is not reflected in the balance sheet as at 31 December 2017 as it is subject to shareholder approval.

8. Goodwill

 


£'000

Cost and net book amount


At 31 December 2015

40,176

Acquisition of subsidiary (Everyday Loans)

91,894

At 31 December 2016

132,070

Acquisition of subsidiary (George Banco)

8,598

At 31 December 2017

140,668

The goodwill recognised represents the difference between the purchase consideration and the net assets acquired (including intangible assets recognised upon acquisition). Total goodwill as at 31 December 2017 comprises £40.2m related to the acquisition of Loans at Home, £91.9m related to the acquisition of Everyday Loans, and £8.6m related to the acquisition of George Banco (refer note 12).

The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired. The assessment of impairment of goodwill reflects a number of key estimates, each of which can have a material effect on the carrying value of the asset. These include:

 

·      earnings forecasts which have been extracted from the budget, which involves inherent uncertainty, particularly in respect of gross loan values, collections performance and the cost base of the business;

·      the price earnings multiple applied to the cash flow forecasts;

·      estimates made on the disposal costs of the business; and

·      the discount rate applied to determine the NPV of future cash flows.

 

The recoverable amount has been determined based on a fair value less cost-to-sell calculation.  That calculation uses earnings projections based on financial budgets approved by management covering a three year period to 31 December 2020, disposal costs have been estimated at 2% and a discount rate of 12% has been used for the Group. The Directors have estimated the discount rate using post-tax rates that reflect current market assessments of the time value of money and the risks specific to the market. None of the goodwill is tax deductible.

 

Considering the key estimates above, the Group has identified that it would require a movement in all of the judgements and estimates of greater than 33% (Loans at Home), 10% (Everyday Loans) and 35% (George Banco), to give rise to a potential impairment charge to the carrying value of goodwill recognised for each CGU. Furthermore, it would require the following percentage decreases in 2020 forecast earnings to necessitate an impairment charge to the carrying value of goodwill: 61% at Loans at Home, 21% at Everyday Loans and 54% at George Banco.

The Group considers that there is no reasonably foreseeable reduction in the assumptions which would give rise to impairment and therefore no further sensitivity has been presented.

 

9. Intangible assets

 


Customer lists

£'000

Agent network

£'000

Brand

£'000

Broker relationships £'000

Technology

£'000

Total

£'000

Cost







At 1 January 2017

19,362

540

1,794

4,233

6,227

32,156

Additions through acquisition

2,562

-

211

4,918

-

7,691

At 31 December 2017

21,924

540

2,005

9,151

6,227

39,847

 

Amortisation







At 1 January 2017

11,725

356

497

1,129

1,038

14,745

Charge for the year

4,048

63

334

1,895

1,557

7,897

At 31 December 2017

15,773

419

831

3,024

2,595

22,642

 

Net book value







At 31 December 2017

6,151

121

1,174

6,127

3,632

17,205

At 31 December 2016

7,637

184

1,297

3,104

5,189

17,412

 

Intangible assets include acquired intangibles in respect of the customer list and agent relationships at Loans at Home (formerly Loansathome4u) and acquired intangibles in respect of the customer list, broker relationships and credit decisioning technology at Everyday Loans together with the Everyday Loans and TrustTwo brands. Intangible assets also include acquired intangibles in respect of the customer list, broker relationships, and brand at George Banco.

The fair value of the customer lists of Loans at Home, Everyday Loans and George Banco on acquisition was estimated by calculating the Net Present Value ('NPV') of the discounted cash flows from each new reloan provided to this discrete set of known customers. The Board of Directors will test the assumptions for reasonableness at each future accounting date, limited to the original known customer lists.

The fair value of Loans at Home's agent relationships on acquisition was estimated by valuing the cost to set up a similar network of trained agents.

The fair value of Everyday Loans' broker relationships on acquisition was estimated by calculating the NPV of the discounted cash flows from the cost avoided each year due to having the broker relationships in place on new loan volumes written by existing brokers. The fair value of George Banco's broker relationships on acquisition was estimated by calculating the NPV of the discounted cash flows from each new loan sold as a result of the strength of the broker relationship and reputation of George Banco, limited to three years of loan origination from the date of acquisition. The Board of Directors will test the assumptions for reasonableness at each future accounting date, limited to the then existing brokers.

The fair value of Everyday Loans' credit decisioning technology on acquisition was estimated by assessing the likely commercial level of royalties that would be payable to a third party were the technology licenced rather than owned, calculated as a percentage of forecast revenues and discounted to the date of the transaction. The Board of Directors will assess the technology for impairment using the same methodology at each future accounting date.

The fair value of Loans at Home's brand (which at acquisition was loansathome4u), the Everyday Loans, TrustTwo and George Banco brands on acquisition were estimated by assessing the likely commercial level of royalties that would be payable to a third party were the brand licensed rather than owned, calculated as a percentage of forecast revenues and discounted to the date of the transaction. Due to rebranding the loansathome4u brand to Loans at Home, the intangible asset was written off in 2016. The Board of Directors will assess the remaining brands for impairment using the same methodology at each future accounting date.

 

Amortisation is charged to the statement of comprehensive income, over their estimated useful lives as follows:

Customer lists

Between 3 and 7 years

Agent network

3 years

Broker relationships

2 to 3 years

Credit decisioning technology

4 years

Brands

Between 1 and 5 years

The useful economic life and amortisation method of intangible assets are reviewed at least at each balance sheet date. Impairment of intangible assets is only reviewed where circumstances indicate that the carrying value of an asset may not be fully recoverable.

 

10. Amounts receivable from customers

 


2017

£'000

2016

£'000

Credit receivables

284,316

204,775

Loan loss provision

(24,480)

(24,362)

Amounts receivable from customers

259,836

180,413

 

Customer receivables originated by the Group are initially recognised at the amount loaned to the customer plus directly attributable costs. Subsequently, receivables are increased by revenue and reduced by cash collections and any deduction for impairment. The Directors assess on an ongoing basis whether there is objective evidence that customer receivables are impaired at each balance sheet date.

The movement on the loan loss provisions for the period relates to the provision at Loans at Home, Everyday Loans and TrustTwo for the year and George Banco since the date of acquisition. The amounts receivable from customers were recognised at fair value (net loan book value) at the date of acquisition and subsequently measured at amortised cost net of any impairment.

Analysis of overdue receivables from customers

 

2017

£'000

2016

£'000

Not past due or impaired

227,241

163,777

Past due but not impaired

14,508

10,286

Impaired

18,087

6,350


259,836

180,413

 

Everyday Loans1:

2017

£'000

2016

£'000

Rescheduled loans

19,237

11,313


19,237

11,313

1 Everyday Loans make monthly collections.

 


2017

£'000

2016

£'000

Loans at Home2 past due not impaired:



One week overdue

8,785

6,278

Two weeks overdue

3,468

2,129

Three or four weeks overdue

2,255

1,879


14,508

10,286

2 Loans at Home make weekly collections.

Guarantor Loans3:

2017

£'000

2016

£'000

Rescheduled loans

2,407

-


2,407

-

3 George Banco and TrustTwo make monthly collections. There is no comparable information for George Banco in 2016 as it was acquired on 17 August 2017.

Analysis on movement on loan loss provision


£'000

At 31 December 2015

1,923

Provision on acquisition of Everyday Loans

6,105

Charge for the year

23,201

Amounts written off during the year

(4,378)

Unwind of discount

(2,489)

At 31 December 2016

24,362

Provision on acquisition of George Banco

4,252

Charge for the year

28,795

Amounts written off during the year

(32,188)

Unwind of discount

(741)

At 31 December 2017

24,480

The average EIR used during the year ended 31 December 2017 for Loans at Home was 273% (2016: 316%), for Everyday Loans was 47.5% (2016: 45%), and for Guarantor Loans was 40.2% (2016: n/a).

11. Deferred tax liability

 


£'000

At 31 December 2015

(3,057)

Recognition of intangible assets at acquisition

(2,801)

Recognition of fair value adjustments on amounts receivable at acquisition

(4,750)

Adjust for changes in deferred tax rate

685

Recognition of deferred tax asset at acquisition

586

Current year credit

3,447

At 31 December 2016

(5,890)

Recognition of intangible assets at acquisition

(1,461)

Recognition of fair value adjustments on amounts receivable at acquisition

(1,547)

Adjust for changes in deferred tax rate

31

Charge relating to share based payments

13

Recognition of deferred tax asset at acquisition

530

Current year credit

3,328

At 31 December 2017

(4,996)

The deferred tax liability was recognised on the intangible assets upon acquisition of Loans at Home, Everyday Loans and George Banco (refer to note 12) in relation to intangible assets on which no tax deduction will be claimed in future periods for amortisation.

 

 

The deferred tax liability is attributable to temporary timing differences arising in respect of:


2017

£'000

2016

£'000

Accelerated tax depreciation

(65)

163

Recognition of intangible assets

(3,269)

(3,308)

Recognition of fair value adjustments on amounts receivable at acquisition

(2,277)

(3,008)

Capital gains

-

(20)

Other short term timing differences

219

258

Recognition of deferred tax relating to share based payments

22

-

Other losses and deductions

374

24

Net deferred tax liability

(4,996)

(5,890)

 

12.  Acquisition of subsidiary

 

George Banco

 

On 17 August 2017, the Group obtained control of the George Banco group, which consists of George Banco Limited, George Banco.Com Limited and GeorgeFinance.Com Limited. The Group obtained control through the purchase of 100% of the share capital. The acquisition of George Banco is in line with the Group's strategy to be a leader in each of its chosen business segments.

 

The fair values of the identifiable assets and liabilities of George Banco as at the acquisition date were as follows:

 


Amounts recognised at acquisition date

Fair value adjustments

Total


£'000

£'000

£'000

Intangible assets1

-

7,691

7,691

Property, plant and equipment

125

-

125

Amounts receivable from customers2

28,829

8,141

36,970

Trade receivables

50

-

50

Cash and cash equivalents

2,137

-

2,137

Trade and other payables

 (380)

-

 (380)

Loans and borrowings

(34,134)

-

(34,134)

Deferred tax liabilities3

-

 (2,478)

 (2,478)


 (3,373)

13,354

9,981

Goodwill



8,598

Total consideration



18,579





Satisfied by:




Cash



18,579

Net cash outflow arising on acquisition:




Cash consideration



18,579

Cash and cash equivalents acquired



 (2,137)




16,442

 

1    £2,561,791 has been attributed to the fair value of George Banco's customer list, £4,917,977 to the broker relationships and £210,844 to the George Banco brand (refer to note 9).

2    An adjustment to receivables of £8,141,189 has been made to reflect the fair value of the receivables book at the acquisition date.

3    Deferred tax liability of £2,477,875 has been recognised on the intangibles and the fair value adjustment of the receivable book at acquisition (refer to note 11).

 

George Banco contributed £4.5m to the Group's revenue and £0.5m profit before tax (before fair value adjustments) for the period from the date of acquisition to 31 December 2017. Reported revenue was £4.4m and £0.4m profit before tax (after fair value adjustments) from the date of acquisition to 31 December 2017.

 

Everyday Loans


On 13 April 2016, the Group obtained control of the Everyday Loans Holdings Limited group, which consists of Everyday Loans Holdings Limited, Everyday Loans Limited and Everyday Lending Limited. The Group obtained control through the purchase of 100% of the share capital. The Everyday Loans group acquisition satisfied the objective of gaining a presence in two of Non-Standard Finance plc's target sectors, branch-based unsecured lending and guarantor loans (TrustTwo).

The fair values of the identifiable assets and liabilities of Everyday Loans as at the acquisition date were as follows:

 

 

 

Amounts recognised at acquisition date

£'000

Fair value adjustments

£'000

Total

£'000

Intangible assets1

-

14,006

14,006

Property, plant and equipment

563

-

563

Amounts receivable from customers2

115,563

23,749

139,312

Trade receivables

4,259

-

4,259

Cash and cash equivalents

1,807

-

1,807

Trade and other payables

(7,342)

-

(7,342)

Corporation tax liability

(1,949)

-

(1,949)

Deferred tax liabilities3

-

(7,551)

(7,551)


112,901

30,204

143,105

Goodwill



91,895

Total consideration



235,000

Satisfied by:




Cash and shares



235,000

Net cash outflow arising on acquisition:




Cash consideration



215,000

Share consideration



20,000

Cash and cash equivalents acquired



(1,807)

Corporation tax credit



(1,864)

Other acquired asset



(545)




230,784

1    £2,050,000 has been attributed to the fair value of Everyday Loans' customer list, £4,233,000 to the broker relationship, £1,447,000 to the Everyday Loans brand, £49,000 to the TrustTwo brand and £6,227,000 to technology (refer to note 9).

2    An adjustment to receivables of £23,749,000 has been made to reflect the fair value of the receivables book at the acquisition date.

3    Deferred tax liability of £7,551,000 has been recognised on the intangibles and the fair value adjustment of the receivable book at acquisition (refer to note 11).

The fair value measurement of acquired assets is based upon financial forecasts, which are categorised as level 3 within the IFRS 13 fair value hierarchy.

 

 

13. Share capital and share premium

 

On 7 January 2016, the share capital was increased by the issuance of 188,235,825 Ordinary Shares of £0.05 each at a premium of £0.80 each.

 

Upon completion of the acquisition of the Everyday Loans Group from Secure Trust Bank plc on 13 April 2016, the share capital was further increased by the issuance of 23,529,412 Ordinary Shares of £0.05 each at a premium of £0.80 each to Secure Trust Bank plc.

 

All shares in issue are ordinary 'A' shares consisting of £0.05 per share. All shares are fully paid up.

The Company's share capital is denominated in Sterling. The Ordinary Shares, save those held in treasury, rank in full for all dividends or other distributions, made or paid on the ordinary share capital of the Company. As at 31 December 2017, a total of 1,868,135 shares had been repurchased by the Company and are held in treasury.

 

 

Share movements


Number

Balance at 31 December 2015

105,284,445

Shares issued during 2016

211,765,237

Balance at 31 December 2016 and at December 2017

317,049,682

 

The share premium account is used to record the aggregate amount or value of premiums paid when the Company's shares are issued at a premium. Transaction costs of £nil (2016: £7,131,000) directly relating to raising finance have been deducted from share premium in the year.


Total

£'000

Balance at 31 December 2015

92,714

Premium arising on issue of Ordinary Shares in 2016

169,412

Issue costs in 2016

(7,131)

Balance at 31 December 2016 and at December 2017

254,995

 

14. Net cash used in operating activities



Year ended

31 December
2017

£'000


Year ended

31 December
2016

£'000

Operating loss

(2,540)

(5,858)

Taxation paid

(2,226)

(1,341)

Depreciation

1,497

690

Share based payment charge

291

-

Amortisation of intangible assets

7,897

10,714

Fair value unwind on acquired loan book

11,985

8,342

Profit on disposal of property, plant and equipment

(416)

(363)

Decrease in inventories

-

3

Increase in amounts receivable from customers

(54,437)

(21,039)

Increase in receivables

(51)

(7,737)

Increase/(decrease) in payables

1,000

(6,952)

Cash used in operating activities

(37,000)

(23,541)

 

 

 


This information is provided by RNS
The company news service from the London Stock Exchange
 
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Full Year Results to 31 December 2017 - RNS