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RNS
Non-Standard Finance PLC  -  NSF   

Half-year Report

Released 07:00 03-Aug-2016

RNS Number : 0523G
Non-Standard Finance PLC
03 August 2016
 

 

 

 

 

 

Non-Standard Finance plc

 

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

 

Unaudited Half Year Results to 30 June 2016

 

3 August 2016

Highlights

 

·     

Normalised revenue1 of £31.3m (2015: nil); reported revenue of £29.1m (2015: nil)

·     

Normalised adjusted operating profit1 of £3.9m (2015: loss of £0.9m); reported adjusted operating loss of £3.1m (2015: adjusted operating loss of £0.9m)

·     

On a pro forma basis2, normalised revenue was £44.9m (2015: n/a); adjusted operating profit was £8.7m (2015: n/a); operating profit was £7.7m (2015: n/a)

·     

Acquisition of Everyday Loans completed on 13 April 2016 following FCA approval

·     

Full FCA licence awarded to Everyday Loans and Trusttwo

·     

Strong loan book growth across all divisions since acquisition to reach £146.8m before fair value adjustments (£168.8m after fair value adjustments) at 30 June 2016

·     

Total committed facilities of £95m, including the additional £10m facility recently agreed, with ability to request an increase to £120m; at 30 June 2016 £73.7m had been drawn

·     

Maiden half year dividend declared totalling £1.0m (2015: nil) or 0.3p per share (2015: nil)

·     

Current trading: loan book growth continuing and the Group on-track to achieve 20% loan book growth per annum and  a 20% return on assets in 2017

 

 

Financial summary

 

6 months to 30 June

 

2016

Normalised1

2016

Fair value

adjustments,

amortisation of acquired

intangibles

2016

Reported

2015

Reported


£000 

£000 

£000 

£000 

Revenue

31,315 

(2,192)

29,123 

-

Impairments

(9,891)

-

(9,891)

-

Admin expenses

(17,498)

(4,807)

(22,305)

(910)

Adjusted operating profit (loss)

3,926 

(6,999)

(3,073)

(910)

Temporary additional commission3

(1,002)

-

(1,002)

-

Operating profit (loss)

2,924 

(6,999)

(4,075)

(910)

Exceptional items

-

(626)

(626)

-

Profit (loss) before interest and tax

2,924 

(7,625)

(4,701)

(910)

Net finance (cost) income

(1,301)

-

(1,301)

52 

Profit (loss) before tax

1,623 

(7,625)

(6,002)

(858)

Taxation

(316)

1,400 

1,084 

-

Profit (loss) after tax

1,307

(6,225)

(4,918)

(858)






Earnings (loss) per share



(1.67)p

(2.20)p

Dividend per share



0.30p

-

 

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

2Assuming Everyday Loans was acquired on 1 January 2016 and adjusted to exclude fair value adjustments and amortisation of acquired intangibles. Note it has not been possible to present a comparative figure for the first half of 2015

3 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

 

 

Group pro forma results

 

In order to set out clearly the underlying performance of the Group, the table below provides an analysis of the normalised pro forma results for the enlarged Group for the six month period to 30 June 2016. The pro forma results include Everyday Loans and Trusttwo for the six months ended 30 June 2016.

 

6 months to 30 Jun 16

Pro forma normalised4

Everyday

Loans

Loans at Home

 

Trusttwo

Central costs

 

NSF plc

Pro forma


£000 

£000 

£000 

£000 

£000 

Revenue

23,038 

20,700 

1,136 

-

44,874 

Impairments

(4,410)

(7,849)

(179)

-

(12,438)

Revenue less impairments

18,628 

12,851 

957 

-

33,436 

Admin expenses

(10,392)

(11,013)

(492)

(1,815)

(23,712)

Adjusted operating profit

8,236 

1,838 

465 

(1,815)

8,724 

Temporary additional commission

-

(1,002)

-

-

(1,002)

Operating profit

8,236 

836 

465 

(1,815) 

7,722 

Net finance cost

(2,792)

(176)

(185)

(271)

(3,424)

Profit before tax

5,444 

660 

280 

(2,086)

4,298 







 

4Assuming Everyday Loans was acquired on 1 January 2016 and adjusted to exclude fair value adjustments and amortisation of acquired intangibles. Note it has not been possible to present a comparative figure for the first half of 2015

 

 

John van Kuffeler, Non-Standard Finance's Chairman, said

 

"The Group has achieved a solid first half performance, reflecting the positive response to the changes implemented in each of our three business divisions. Loan book growth is in-line with our annual target of 20% and customer numbers are also growing strongly with the result that we remain on-track to achieve our targets of 20% annual loan book growth and a 20% return on assets in 2017.

 

"The vast majority of our customers benefit from our face-to-face model that delivers positive customer outcomes and has a history of robust performance during periods of economic uncertainty. In addition, Britain's decision to leave the EU may increase demand for our products if mainstream lenders seek to tighten credit further. Since the end of June 2016, each of our businesses has continued to deliver loan book growth and while the important Christmas period lies ahead for Loans at Home, the Group's performance to-date underpins our confidence in the full year outlook. Accordingly, we are pleased to declare a maiden half year dividend of £1.0m, or 0.3p per share."

 

Context for results

 

·     

The 2016 half year results include a full period for Loans at Home and approximately three months of Everyday Loans (including Trusttwo) that completed on 13 April 2016;

·     

The Company was incorporated on 8 July 2014 and admitted to trading on the main market of the London Stock Exchange in February 2015 raising £103m of new equity; and

·     

Loans at Home was acquired on 4 August 2015 and as a result the 2015 half year results contain no operating results and reflect the costs of the parent company only.

 

 

- Ends -

 

Interviews with John van Kuffeler, Chairman 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 3 August 2016 on the Group's website: www.nonstandardfinance.com.

 

Analyst meeting, webcast, dial-in and conference call details

There will be an analyst meeting at 9.00 am for invited UK-based analysts at the offices of Bell Pottinger, 6th Floor Holborn Gate, 330 High Holborn, London, WC1V 7QD. 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.nonstandardfinance.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 9.00 am, 3 August 2016

08.50 am

Please call + 44 20 3059 8125

Title

NSF Half Year Results

9.00 am

Meeting starts

 

All times are British Summer Time (BST).

 

 

For more information:

 

Non-Standard Finance plc

John van Kuffeler, Chairman

Nick Teunon, Chief Financial Officer & Company Secretary

Peter Reynolds, Director, IR and Communications

c/o Bell Pottinger

 

+44 (0) 20 3772 2500

Bell Pottinger

Olly Scott

Aarti Iyer

Molly Stewart

+44 (0) 20 3772 2500

 

About Non-Standard Finance

 

Non-Standard Finance plc was established 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 now established a sustainable group of businesses offering credit to the c.12 million UK adults who are not served by (or choose not to use) mainstream financial institutions. In addition, the businesses acquired now have access to increased levels of funding and have benefited from stronger management controls; have refined their product pricing in a number of areas; have introduced new compliance protocols; and are investing in new IT infrastructure and systems. These changes have been implemented to balance the delivery of improved customer outcomes with the generation of substantial returns for shareholders.  The two acquisitions made were:

 

·     

Loans at Home - The Company announced on 7 July 2015 that it had entered into an agreement to acquire the Home Credit Division of S&U plc ('S&U') which trades as Loans at Home, for an enterprise value of £82.5m, payable in cash, subject to approval by S&U's shareholders and customary closing conditions. The acquisition completed on 4 August 2015 following approval by S&U's shareholders with the final consideration equalling £82.4m after an adjustment for net assets at completion.

 

·     

Everyday Loans - On 4 December 2015 the Company announced that it had entered into an agreement to acquire Everyday Loans, the branch-based unsecured lending and guaranteed loans business of Secure Trust Bank PLC, for an enterprise value of £235m. The acquisition, that was funded through a combination of new equity and debt facilities, completed on 13 April 2016, following change of control approval from the FCA.

 

 

Chairman's statement

 

Results

 

The first half of 2016 has been a busy period from both an operational and strategic perspective and I am therefore delighted to report normalised revenue of £31.3m (2015: nil) and normalised operating profit of £3.9m (2015: nil).  Reported revenue after fair value adjustments, was £29.1m (2015: nil) and reported loss before interest and tax was £4.7m (2015: loss of £0.9m).  On a pro forma normalised basis, assuming Everyday Loans and Trusttwo had been owned for the full period, the Group generated pro forma revenue of £44.9m (2015: n/a), pro forma adjusted operating profit of £8.7m (2015: n/a) and pro forma operating profit of £7.7m (2015: n/a).

 

The size of our combined net loan book across all businesses as at 30 June 2016 was £146.8m before any fair value adjustment (£168.8m after fair value adjustments) and we remain on course to achieve our objectives of 20% loan book growth per annum and a return on assets ('ROA') of 20% in 2017.

 

Everyday Loans

Everyday Loans is the UK's largest branch-based provider of unsecured loans in the non-standard finance segment.  Upon completion of the Everyday Loans acquisition on 13 April 2016, we set about implementing our plans to expand the branch network; return the product offering to include higher APR business; and refine the pricing of certain products in accordance with a new and refined credit scorecard. Whilst the full benefit of these measures will begin to take effect during the second half of 2016, the business has performed as expected and achieved a strong performance in the first half with normalised operating profit of £3.6m (2015: nil) and pro forma operating profit of £8.2m.

 

Loans at Home

Loans at Home (previously Loansathome4u) is one of the UK's largest providers of home credit and has 98,000 active customers.  The business is growing faster than we expected pre-acquisition and has responded to each of the management, operational and structural changes that we have introduced since taking control of the business in August 2015. As described in more detail below, our planned growth in the number of agents and customers has been better than we expected just a few months ago and the net value of loans issued is up 27% in the first six months of 2016 versus the same period in 2015.  As a consequence of this strong growth, impairments have increased by more than originally expected and we are managing this carefully.  We have also chosen to increase our investment in temporary additional agent commission before the full benefit of this growth feeds through into revenue and profit. Loans at Home delivered an adjusted operating profit of £1.6m (2015: nil) and a normalised adjusted operating profit of £1.8m, the difference being the unwinding of the fair value adjustment made on acquisition.  The business is continuing to grow its loan book as we enter the seasonally important second half of the year when we expect both impairments as a percentage of revenue and additional agent commission to reduce from their peak in the first half.

 

Trusttwo

Founded in 2014, Trusttwo is focused on the issue of guaranteed loans, a market that we believe represents a significant growth opportunity for the Group and where we are well-placed to capture a meaningful share of what is an exciting and rapidly growing market. As a result, whilst Trusttwo is currently small relative to the other divisions, we have chosen to split out its financial performance to provide greater transparency on this area of our business. Benefiting from the existing infrastructure of Everyday Loans, Trusttwo has already established itself as an attractive alternative to the market leader on the back of excellent relationships with the broking community that remains a significant source of new customers. In the six months to 30 June 2016, Trusttwo delivered an operating profit of £0.3m (2015: nil) and on a pro forma basis, an operating profit of £0.5m.

 

Business strategy

 

Our platform for growth is now in place: we have leading positions in both home credit and branch-based lending in the UK and a scalable presence in guaranteed loans. We are focused on growing both revenue and profits through operational improvements and the deployment of an efficient capital structure. Whilst further acquisitions are not required to achieve our targeted loan book growth of 20% per annum with a return on assets ('ROA') of 20%, we continue to review small bolt-on targets that can accelerate the achievement of our plans whilst meeting our required thresholds for financial returns and acceptable risk.

 

Our chosen sub-sectors of the UK's non-standard finance segment (home credit, branch-based lending and guaranteed loans) have significant potential and we believe that through careful and modest investment in our infrastructure and by drawing upon the wealth of management experience that now resides within the Group, we have an opportunity to deliver substantial revenue growth and attractive financial returns for shareholders.

 

The achievement of our objectives will always be subject to a rigorous assessment of the associated commercial, regulatory and reputational risks. At its heart is our commitment to treating customers fairly, delivering excellent service and lending responsibly. Only by safeguarding these core principles in all areas of our business will we achieve our long-term goals and deliver the growth and returns to which we aspire.

 

Financing

 

The Company's IPO and subsequent acquisition of Everyday Loans involved raising approximately £283m in new equity and £85m in new debt facilities. To support the significant growth rates now being achieved by both Loans at Home and Everyday Loans and to provide the flexibility to pursue small bolt-on acquisitions should any suitable opportunities arise, we have also now put in place a further £10m debt facility for Loans at Home from Shawbrook Bank Limited, with an opportunity to increase this to £15m with the bank's consent. The new facility is for a three-year term and contains the usual terms and conditions for a facility of this type. Therefore, committed facilities available to the Group now total £95m with the ability to increase this, with the banks' consent, to £120m.

 

Regulation

 

Having submitted its application for full authorisation in 2015, Everyday Loans, including Trusttwo, received all of its remaining permissions from the Financial Conduct Authority (FCA) on 20 June 2016.

 

Loans at Home operates under an interim consumer credit permission from the FCA and submitted its application for full authorisation in June 2015. Supplementary information has been supplied to the FCA following completion of our acquisition of the company and we expect to receive full authorisation in due course, at the same time as the other major home credit providers.

 

Whilst the FCA is continuing to review a number of areas within the non-standard finance segment, we believe that our approach is responsible, appropriate and focused on treating customers fairly.  In both home credit and branch-based lending we build a personal relationship with the customer through face-to-face contact and are better able to undertake a thorough assessment both of the customer's ability to afford a particular loan as well as their prevailing circumstances that can in turn help to identify any vulnerability or potential vulnerability. In guaranteed loans, we invest the time needed to explain to both customer and guarantor all aspects of the lending process, ensuring that all parties are clear on their obligations under any agreement having conducted appropriate affordability checks on both.  Our approach allows us to lend to segments of the population that might otherwise be unable to access credit and so helps them to smooth some of the peaks and troughs in their income and expenditure.  It also helps us to safeguard our own profitability by ensuring we make good lending decisions and can deliver the returns required by our investors and other providers of capital.

 

A summary of some of the recent regulatory developments that may have a bearing on the Group's businesses is set out in the appendix.

 

Dividend policy and half year dividend

 

We expect that the strong cash flows generated by the Group's businesses will support a progressive dividend policy whilst at the same time underpinning sustainable growth in its loan book.  Accordingly, the Board is delighted to declare a maiden half year dividend of 0.3p per share (2015: nil) with a total half year dividend pay-out of approximately £1.0m (2015: nil) affirming our intention to deliver both yield and EPS growth to shareholders.

 

The medium-term dividend policy objective is to pay-out 50% of annual post-tax earnings, with a split between the half year and full year dividend of approximately one-third:two-thirds.

 

The half year dividend of 0.3p per share (2015: nil) will be payable on 19 October 2016 to those shareholders on the register of shareholders on 23 September 2016 (the 'Record Date').

 

Current trading and outlook

 

Building upon our strong positions in both branch-based lending and home credit, I am pleased to report that the Group has continued to make good progress.

 

While Britain's decision to leave the European Union has prompted significant uncertainty in global financial markets, our businesses have a history of robust performance in times of economic uncertainty. Moreover, any tightening of credit by mainstream financial institutions in response to market volatility may present further opportunities for the Group as consumers seek alternative sources of credit. 

 

Since the end of June 2016, each of our businesses has continued to grow its loan book and whilst the run up to Christmas remains an important period for our home credit business, our performance to date underpins our confidence in the full year outlook.

 

John de Blocq van Kuffeler

Chairman

3 August 2016

 

 

Financial review

 

The timing and significance of the acquisition of Everyday Loans means that the reported results for the Group in the first half of 2016 do not reflect the underlying performance of the Group's operations and so we have also provided pro forma figures to illustrate what revenues, profits and other key performance metrics would have been, had Everyday Loans been acquired at the beginning of 2016.

 

Both the reported and pro forma results are significantly affected by temporary additional commission paid to newly signed-up agents at Loans at Home, fair value adjustments and the amortisation of acquired intangibles. There are no directly comparable pro forma figures for the first half of 2015 as the Company listed in February 2015 as a cash shell and had no revenue during the first half of 2015.

 

Group reported results

 

The reported results for the Group include a full period of Loans at Home that was acquired on 4 August 2015 and approximately three months' performance from Everyday Loans that was acquired on 13 April 2016.

 

6 months to 30 Jun

2016

2016


Normalised

Fair value

adjustments and

amortisation of

acquired

intangibles

Reported

Reported

 

 

 

 


£000 

£000 

£000 

£000 

Revenue

31,315 

(2,192)

29,123 

-

Impairments

(9,891)

-

(9,891)

-

Revenue less impairments

21,424 

(2,192)

19,232 

-

Administrative expenses

(17,498)

(4,807)

(22,305)

(910)

Adjusted operating profit (loss)

3,926 

(6,999)

(3,073)

(910)

Temporary additional commission

(1,002)

-

(1,002)

-

Operating profit (loss)

2,924 

(6,999)

(4,075)

(910)

Exceptional items

-

(626)

(626)

-

Net finance (cost)/income

(1,301)

-

(1,301)

52 

Profit (loss) before tax

1,623 

(7,625)

(6,002)

(858)

Tax

(316)

1,400 

1,084 

-

Profit (loss) after tax

1,307 

(6,002)

(4,918)

(858)

Earnings (loss) per share



(1.67)p

(2.20)p

Dividend per share



0.30p

-

 

Normalised revenue was £31.3m (2015: nil) reflecting a full period of Loans at Home and approximately three months of Everyday Loans. This fed through into an adjusted operating profit of £3.9m (2015: loss of £0.9m). This was then reduced by temporary additional commission paid to newly signed-up agents of £1.0m (2015: nil) as well as fair value adjustments and amortisation of acquired intangibles totalling £7.0m (2015: nil). As a result, the reported operating loss in the first half of 2016 was £4.1m (2015: loss of £0.9m). Exceptional costs of £0.6m and net interest costs of £1.3m (2015: net interest income of £52,000) resulted in a reported loss before tax of £6.0m (2015: £0.9m). A net tax credit of £1.1m meant that the loss after tax was £4.9m (2015: £0.9m) equating to a reported loss per share of 1.67p (2015: 2.2p).

 

All the above activities relate to continuing operations. A more detailed review of each of the operating businesses is outlined below showing results on a pro forma as well as a reported basis.

 

 

Divisional overview

 

Everyday Loans

 

Having announced the proposed acquisition of Everyday Loans on 4 December 2015, the transaction completed on 13 April 2016 following receipt of the requisite change of control approval from the FCA. As a result, we have included both reported and pro forma figures for Everyday Loans.

 

As the largest branch-based lender in the UK's non-standard finance sector, Everyday Loans is well-positioned to continue to fill the void left by a number of major sub-prime, branch-based lenders that exited the market in the aftermath of the financial crisis.

 

As at 30 June 2016 Everyday Loans had over 37,000 active customers across the UK, the vast majority of whom make their initial contact remotely but whose application is then reviewed during an interview that usually takes place face-to-face in one of our branches. The investment in branch-based lending creates a more bespoke and thorough lending experience which benefits our customers as well as the business by enabling better lending decisions.

 

As a result, Everyday Loans's track record and financial performance has remained strong through the economic cycle while many other lenders have faltered. Customers appreciate the greater amount of personal contact in our business model, as evidenced by high satisfaction levels amongst existing customers, many of whom are likely to bring repeat business and refer new customers to us.

 

Reported results

 

Normalised revenue was £10.0m (2015: nil) and reflected the inclusion of Everyday Loans from 13 April 2016. Fair value adjustments of £2.0m (2015: nil) were due to the unwinding of the adjustment made to the acquired loan portfolio and resulted in reported revenue of £8.1m (2015: nil). Impairments were £2.0m (2015: nil) while administrative expenses were £4.4m (2015: nil) resulting in total normalised operating profit of £3.6m (2015: nil) and reported operating profit of £1.7m.

 

Since completing the acquisition in April 2016 we have enabled the business to expand its product range and lend to a wider customer base that continues to deliver attractive risk-adjusted returns. We continue to believe that the branch-based approach provides Everyday Loans with a significant advantage over other more remote lenders in being able to properly assess both affordability and propensity to pay and so whilst customers with lower credit scores do carry more risk, at higher APRs the risk-adjusted return remains attractive.

 

6 months to 30 June

 

 

2016

Normalised6

 

2016

Fair value

Adjustments

2016

Reported

 

2015

Reported

 


£000 

£000 

£000 

£000 

Revenue

10,047 

(1,979)

8,068 

-

Impairments

(1,979)

-

(1,979)

-

Revenue less impairments

8,068 

(1,979)

6,089 


Admin expenses

(4,434)

-

(4,434)

-

Operating profit

3,634 

(1,979)

1,655 

-

Net finance cost

(787)

-

(787)

-

Profit before tax

2,847 

(1,979)

868 

-

Taxation

(560)

396 

(164)

-

Profit after tax

2,287 

(1,583)

704 

-






Key Performance Indicators





Number of branches

36 


36 

-

Period end customer numbers (000)

37.2 


37.2 

-

Period end loan book7

£112.6m 


£112.6m 

-

Operating profit margin

36.2% 


20.5% 

-

Impairments/revenue

19.7% 


24.5% 


 

6 Reported figures, adjusted to exclude fair value adjustments and amortisation of acquired intangibles

7 Excluding fair value adjustments

 

Pro forma results

 

Pro forma normalised revenue reached £23.0m driven by further growth in the loan book that by 30 June 2016 had reached £112.6m, thanks to continued strong demand for the Group's products as well as the benefit of an increase in yield from a shift in the product mix. Impairments were 19.1% of revenue or £4.4m reflecting the strong loan book growth and an expansion of the Group's customer base. Administrative expenses were £10.4m resulting in normalised operating profit of £8.2m.

 

6 months to 30 June

 

 

2016

Pro forma

Normalised8


£000 

Revenue

23,038 

Impairments

(4,410)

Revenue less impairments

18,628 

Admin expenses

 (10,392)

Operating profit

8,236 

Net finance cost

(2,792)

Profit before tax

5,444 

Taxation

(1,083)

Profit after tax

4,361  



Key Performance Indicators


Number of branches

36 

Period end customer numbers (000)

37.2 

Period end loan book9

£112.6m 

Operating profit margin

35.7% 

Impairments/revenue

19.1% 

 

8Assuming Everyday Loans was acquired on 1 January 2016 and adjusted to exclude fair value adjustments and amortisation

9 Excluding fair value adjustments

 

Plans for the rest of 2016

 

For the rest of 2016 and into 2017, the two main strategies for growth are to expand the network of 36 branches and establish a broader product offering to once again include customers with lower credit scores.

 

Despite already having a well-established branch based network across the UK, we have identified the potential for up to 20 additional branches thereby reducing the travel time for customers, improving conversion rates and increasing the size of our potential customer base. Having opened a new branch in Preston in July, we plan to open four more new branches in the second half of 2016 which should mean that approximately 80% of postcodes will be within a 30 minute drive of one of our branches.

 

In terms of our customer offer, we continue to develop new products that we believe will complement our existing range, improve conversion and drive further loan book growth.

 

Loans at Home

 

Loans at Home is one of the UK's largest home credit businesses and was acquired on 4 August 2015 for £82.4m. Having installed a new management team in the autumn of 2015, our primary goals for 2016 were to expand the number of agents and increase customer recruitment. Despite having set some ambitious first half targets in terms of loan book growth, number of agents and active customers, the business is ahead of our original plans on each of these key metrics. The shift in approach by the market leader in this segment, changes to the regulatory regime and a generally positive economic backdrop for our target customer segments, have together created a significant opportunity for the business to grow substantially.

 

At completion the business had a total of 557 self-employed agents servicing 87,000 active customers and net loan book of £22.6m. By 30 June 2016 we had grown the number of agents by over 50% to 840 and the number of active customers by 13% to 98,000. Of the 283 new agents added since 4 August 2015, approximately 50% have joined from other home credit businesses and therefore have access to a large potential pool of former home credit customers that they know well and this supports our objectives for future customer and loan book growth. Whilst new agents require additional commission for the transition period during which they establish their own active customer base, this is seen as a modest and worthwhile temporary investment in further loan book growth. In the six months to 30 June 2016, the net value of loans issued was up by 27% versus the same period in 2015. As at 30 June 2016 the net loan book had increased to £26.9m, a 19% increase since 4 August 2015.

 

While the growth in the loan book and the large number of new agencies added has been better than expected, it has also prompted a larger increase in impairments than originally expected.  We are managing this carefully and expect that the ratio of impairments to revenue for the new agencies added will gravitate towards the long-term average as these agencies mature over the next 12-18 months. 

 

The home credit business is highly seasonal with the majority of loans issued during the second half and in particular in the run-up to Christmas and December tends to be the peak lending month. The balance of revenue and profit between the first half and second half of the year is also heavily influenced by the Group's accounting policies. These tend to smooth the recognition of revenue throughout the year while requiring that impairments are made only after there is evidence that a customer balance may be impaired, such as when a payment has been missed.  Given the concentration of lending around Christmas, it is during the early part of the following calendar year that home credit businesses experience the largest impairment charges as the performance of loans made around Christmas becomes apparent.  As a result, profits tend to be weighed towards the second half of the calendar year.

 

Reported results

 

Normalised revenue was £20.7m (2015: nil), reflecting the inclusion of Loans at Home for the first time. Reported revenue was slightly lower due to the unwinding of the fair value adjustment made to the loan book at completion.

 

Adjusted operating profit of £1.8m (2015: n/a) was after deducting administration costs of £11.0m that included £3.7m of agent commissions (2015: n/a). We have broken out the £1.0m of temporary additional commission (2015: nil) that was paid in the period to new agents joining our network since August 2015. These agents are already proving to be high performers both in terms of collections and the number of new customers they are adding to our network, both of which are encouraging lead indicators as we enter the seasonally important second half. Reported operating profit was £0.6m (2015: nil) reflecting the cost of temporary additional commission paid to agents and the fair value adjustment to revenue outlined above.

 

Our new handheld collections application (app) began a period of live-testing by agents in June 2016 with plans to roll-out company-wide during the third quarter. Loaded on to the agent's own mobile device, the new app has been designed to significantly improve the smooth running of the collection process and should also result in some modest savings in administrative cost. Drawing upon our experience during the testing phase of the collections app, a new lending app is also at an advanced stage of design and is expected to be tested later this year with roll-out to agents expected in early 2017.

 

6 months to 30 June

2016

Normalised10

2016

Fair value

Adjustments

2016

Reported

2015

Reported


£000 

£000 

£000 

£000 

Revenue

20,700 

(213)

20,487 

-

Impairments

(7,849)

-

(7,849)

-

Revenue less impairments

12,851 

(213)

12,638 


Admin expenses

(11,013)

-

(11,013)

-

Adjusted operating profit

1,838 

(213)

1,625 

-

Temporary additional commission

(1,002)

-

(1,002)


Operating profit

836 

(213)

623 


Net finance cost

(176)

-

(176)

-

Profit before tax

660 

(213)

447 

-

Taxation

(132)

43 

(89)

-

Profit after tax

528 

(170)

358 

-

Key Performance Indicators





Period end agent numbers*

840 


840 

557 

Period end number of branches*

44 


44 

39 

Period end customer numbers*

98,000 


98,000 

87,000 

Period end loan book (£m)11*

26.9 


26.9 

22.6 

Adjusted operating profit margin

8.9% 


7.9% 

n/a 

Impairments/revenue

37.9% 


38.3% 

n/a 

                                                                                                                                    

10 Normalised to exclude fair value adjustments related to the acquisition and subsequent restructuring of Loans at Home.

11 Excluding fair value adjustments

* Note KPIs for 2015 are as at 4 August 2015 and after taking into account the various accounting adjustments that were made on acquisition.

 

Plans for the rest of 2016

 

We are focused on delivering loan book growth of at least 20% whilst carefully managing impairments and operating costs. Having enjoyed a period of exceptional growth in the number of agents joining our network since August 2015, we expect to revert to a more steady progression in the second half of 2016 with the result that temporary additional commission costs are expected to begin to reduce, just as the demand for our products reaches its seasonal peak. In addition, as our recently added customer cohorts start to mature, loan volumes should increase and impairments as a percentage of revenue should fall, delivering attractive revenue and profit growth. Whilst we will continue to look for appropriately priced bolt-on acquisition opportunities in the home credit segment and given the strong growth already achieved in the year-to-date, we remain cautious on taking any steps that might distract management from the core operations.

 

Trusttwo

 

The Group's third operating division, Trusttwo, was acquired as part of Everyday Loans. Whilst still relatively small compared with the other two business areas, we believe that it has significant potential and have therefore chosen to split out its financial performance separately from Everyday Loans, again including pro forma and reported results.

 

Started in 2014, Trusttwo operates in the fast growing guaranteed loans segment of the non-standard finance sector and is able to rely on much of the Everyday Loans infrastructure including technology and underwriting.

 

Trusttwo's core customer is typically a UK resident who falls into one of the younger age brackets and has either a limited or impaired credit history. Mainstream lenders would be likely to charge a higher APR for an unsecured loan that may make the loan unaffordable for the customer and result in them being rejected. However, such a customer may be ideal for a guaranteed loan through Trusttwo if they can find a suitable guarantor - normally someone who meets mainstream prime and near prime risk lending requirements. When these borrowers make their loan repayments on time, it can help to improve their credit rating and open-up access to lower cost sources of credit in the future, without needing a guarantor.

 

No upfront fees are charged for the application process. After the applicant's guarantor consents to the arrangement via an online link, successful applications result in the loan being paid into the account of the guarantor who then transfers the funds to the applicant which helps to counter fraudulent applications.

 

Loans typically range in size from £1,000 up to £7,500, can be used for almost any purpose and are repayable in fixed monthly instalments over 13 to 60 months requiring no direct security, (with overpayments allowed at any time without penalty). Interest rates range from 39.9% to 49.9%, with a representative APR of 39.9%.

 

In putting together Trusttwo's operating platform and infrastructure, management ensured that it would be able to scale-up quickly and without significant further investment. Given the size of the opportunity and the inherent operating capacity that exists within its business model, we believe that there is significant scope to grow the business over the coming years.

 

Reported results

 

As at 30 June 2016 the business had a net loan book of £7.3m delivering reported revenue of £0.5m (2015: nil) and operating profit of £0.3m (2015: nil) reflecting the performance in the three month period since acquisition.

 

6 months to 30 June

 

 

2016

Reported

 

2015

Reported

 


£000 

£000 

Revenue

568 

-

Impairments

(63)


Revenue less cost of sales

505 


Admin expenses

(236)

-

Operating profit

269 

-

Net finance cost

(67)

-

Profit before tax

202 

-

Taxation

(40)

-

Profit after tax

162 

-




Key Performance Indicators



Period end customer numbers (000)

3.0 

-

Period end loan book (£m)

7.3 

-

Operating profit margin

47.3% 

-

Impairment/revenue

11.1% 


 

Pro forma results

 

On a pro forma basis, assuming the business had been acquired at the beginning of 2016, Trusttwo generated pro forma revenue of £1.1m and pro forma operating profit of £0.5m.

 

6 months to 30 June

 

2016

Pro forma9


£000 

Revenue

1,136 

Impairments

(179)

Revenue less cost of sales

957 

Admin expenses

(492)

Operating profit

465 

Net finance cost

(185)

Profit before tax

280 

Taxation

(56)

Profit after tax

224 



Key Performance Indicators


Period end customer numbers (000)

3.0 

Period end loan book (£m)

7.3 

Operating profit margin

40.9% 

Impairment/revenue

15.8% 

9Assuming Trusttwo was acquired on 1 January 2016 and adjusted to exclude fair value adjustments and amortisation

 

 

Plans for the rest of 2016

To meet our long-term growth targets for Trusttwo we have already begun to implement a number of operational plans. We recently appointed Richard Sharp as Managing Director of Trusttwo. Richard joined us from Dollar Financial and has 15 years' experience in consumer finance which will prove invaluable in steering Trusttwo through what we plan to be a period of significant growth. Among the initiatives being deployed are: first, an expansion of the parameters for both size of loan and interest rate charged so that both are more in-line with those of our main competitors; second, we intend to leverage the Everyday Loans branch network that has approximately 70-80,000 applications a month, of which over 95% don't get approved or are abandoned and some of which may prove to be attractive leads for Trusttwo; third, we are focused on establishing long-term commercial arrangements with large financial brokers that have expressed a desire to help support an alternative provider to the market leader; fourth, we are focused on improving the customer journey with a view to enhancing their experience as well as improving conversion; and finally we continue to explore the possibility of making one or more small bolt-on acquisitions in the guaranteed loan segment, subject to the availability of suitable opportunities at the right price.

 

Central costs

 

6 months to 30 June

2016

Normalised10

2016

Amortisation of acquired intangibles

2016

Reported

2015

Reported


£000 

£000 

£000 

£000 

Revenue

-

-

-

-

Admin expenses

(1,815)

(4,807)

(6,622)

(910)

Exceptional items

-

(626)

(626)

-

Operating loss

(1,815)

(5,433)

(7,248)

(910)

Net finance (cost)/income

(271)

-

(271)

52 

Loss before tax

(2,086)

(5,433)

(7,519)

(858)

Taxation

416 

961 

1,377 

-

Loss after tax

(1,670)

(4,472)

(6,142)

(858)






 

10 Adjusted to exclude amortisation of acquired intangibles related to the acquisition of Loans at Home and Everyday Loans

 

Administrative expenses for the period totalled £1.8m (2015: £0.9m) and include head office costs associated with the running of the plc as well as advisory and other related expenses associated with the review of potential acquisition targets. In addition, the Group incurred £4.8m of amortisation of intangible assets recognised on the acquisition of both Loans at Home and Everyday Loans (2015: nil). An exceptional charge of £0.6m (2015: nil) related to stamp duty paid at completion on the acquisition of Everyday Loans. Net interest of £0.3m (2015: £0.1m) related to the non-utilisation fee on the Everyday Loans bank facility prior to the drawdown at completion.

 

Principal risks

 

There are a number of potential risks and uncertainties which could have a material impact on the Group's performance over the remaining six months of the financial year and could cause reported and pro forma results to differ materially from expected and historical results

 

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 2015 (which is available for download at www.nonstandardfinance.com) and relate to the following areas:

 

·     

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 as expected or that the outcome from executing such strategy is not as planned; and

·     

Liquidity - while the Group is well-capitalised and has secured committed debt facilities of £95m with an opportunity to increase, with the consent of the banks, to £120m, prevailing uncertainty in global financial markets following the UK's decision to leave the European Union 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.

 

 

On behalf of the Board of Directors

Nick Teunon

Chief Financial Officer

3 August 2016

 

 

Statement of Directors' responsibilities

 

The Directors confirm that, to the best of their knowledge, the unaudited condensed interim financial statements have been prepared in accordance with IAS 34 as adopted by the European Union, and that the interim report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:

 

·     

An indication of important events that have occurred during the first six months of the financial year and their impact on the unaudited condensed interim financial statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and

·     

Material related party transactions that have occurred in the first six months of the financial year and any material changes in the related party transactions described in the last annual report and financial statements

 

 

The current directors of Non-Standard Finance plc are listed in the 2015 Annual Report & Financial Statements. There have been no changes in directors during the six months ended 30 June 2016. A list of current directors is also maintained on the Non-Standard Finance website: www.nonstandardfinance.com.

 

The maintenance and integrity of the Non-Standard Finance website is the responsibility of the Directors. The work carried out by the auditors does not involve consideration of these matters and, accordingly, the auditors accept no responsibility for any changes that may have occurred to the unaudited condensed interim financial statements since they were initially presented on the website.

 

Legislation in the United Kingdom governing the preparation and dissemination of unaudited condensed interim financial statements may differ from legislation in other jurisdictions.

 

 

On behalf of the Board of Directors

Nick Teunon

Chief Financial Officer

 

 

Independent review report to Non-Standard Finance plc

 

We have been engaged by the company to review the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2016 which comprises the income statement, the balance sheet, the statement of changes in equity, the cash flow statement and related notes 1 to 17. We have read the other information contained in the half-yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed set of financial statements.

 

This report is made solely to the company in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board.  Our work has been undertaken so that we might state to the company those matters we are required to state to it in an independent review report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our review work, for this report, or for the conclusions we have formed.

 

Directors' responsibilities

 

The half-yearly financial report is the responsibility of, and has been approved by, the Directors.  The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

The annual financial statements of the company are prepared in accordance with IFRSs as adopted by the European Union.  The condensed set of financial statements included in this half-yearly financial report have been prepared in accordance with the accounting policies the company intends to use in preparing its next annual financial statements.

 

Our responsibility

 

Our responsibility is to express to the Company a conclusion on the condensed set of financial statements in the half-yearly financial report based on our review.

 

Scope of review

 

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

 

Conclusion

 

Based on our review, nothing has come to our attention that causes us to believe that the condensed set of financial statements in the half-yearly financial report for the six months ended 30 June 2016 is not prepared, in all material respects, in accordance with International Accounting Standard 34 as adopted by the European Union and the Disclosure and Transparency Rules of the United Kingdom's Financial Conduct Authority.

 

Deloitte LLP

Chartered Accountants and Statutory Auditor

London, United Kingdom

3 August 2016

 

Financial statements

 

Consolidated statement of comprehensive income for the six months ended 30 June 2016

 


Note

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

Fair value adjustments, amortisation of acquired intangibles and exceptional items

Six months ended
30 June 2016

Period from incorporation to
30 June 2015



£000 

£000 

£000 

£000 







Revenue

4

31,315 

(2,192)

29,123 

-







Cost of sales


(9,891)

-

(9,891)

-

Administrative expenses


(18,500)

(4,807)

(23,307)

(910)







Operating profit/(loss)


2,924 

(6,999)

(4,075)

(910)







Exceptional items

5

-

(626)

(626)

-

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

5

2,924 

 (7,625)

 (4,701)

 (910)

Net finance (cost)/income


(1,301)

-

(1,301)

52 







Profit/(loss) on ordinary activities before tax


1,623 

(7,625)

(6,002)

(858)







Tax on ordinary activities

7

(316)

1,400 

1,084 

-







Profit/(loss) for the period


1,307 

(6,225)

(4,918)

(858)







Total comprehensive profit/(loss) for the period


 

1,307 

 

(6,225)

 

(4,918)

 

(858)







Loss attributable to:






-     Owners of the parent




(4,918)

(858)

-     Non-controlling interests




 

-

 

-

 

 

Loss per share

 

Six months ended 30 June

Note

2016

pence

2015

pence





Basic and diluted

6 

(1.67)

(2.20)

 

 

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

 

 

Consolidated statement of financial position as at 30 June 2016

 


Note

30 June 2016

31 December 2015



£000 

£000 





ASSETS




Non-current assets




Goodwill 
Intangible assets
Property, plant and equipment

9 

10 

 

132,071 

23,318 

3,937 

40,176 

14,119 

1,718 

 

 


159,326 

56,013 

Current assets




Inventories


3 

3 

Amounts receivable from customers

11

168,790 

28,412 

Trade and other receivables


12,388 

10,275 

Cash and cash equivalents


5,002 

7,320 



186,183 

46,010 





Total assets


345,509 

102,023 





LIABILITIES AND EQUITY




Current liabilities




Trade and other payables


9,490 

13,803 

Deferred tax liability

12

9,205 

3,057 



18,695 

16,860 





Non-current liabilities


73,700 

-

Total non-current liabilities


73,700 

-





Equity attributable to owners of the parent




Share capital

13

15,852 

5,264 

Share premium

14

254,995 

92,714 

Retained loss


(17,988)

(13,070)



252,859 

84,908 

Non-controlling interests


255 

255 

Total equity


253,114 

85,163 





Total equity and liabilities


345,509 

102,023 

 

 

These financial statements were approved by the Board of Directors on 3 August 2016.

 

Signed on behalf of the Board of Directors

 

 

Nick Teunon

Chief Financial Officer

3 August 2016

 

 

 

Consolidated statement of changes in equity for the six months ended 30 June 2016

 


Share capital

Share premium

Retained loss

Non-controlling interest

Total


£000 

£000 

£000 

£000 

£000 







At incorporation

-

-

-

-

-







Total comprehensive loss for the period

-

-

(858)

-

(858)







Transactions with owners, recorded directly in equity:






Issue of shares

5,264 

92,714 

-

255 

98,233 













At 30 June 2015

5,264 

92,714 

(858)

255 

97,375 













Total comprehensive loss for the period

-

-

(12,212)

-

(12,212)







At 31 December 2015

5,264 

92,714 

(13,070)

255 

85,163 







Total comprehensive loss for the period

-

-

(4,918)

-

(4,918)







Transactions with owners, recorded directly in equity:






Issue of shares

10,588 

162,281 

-

-

172,869  













At 30 June 2016

15,852 

254,995 

(17,988)

255 

253,114  

 

 

Consolidated statement of cash flows for the six months ended 30 June 2016

 

Six months ended 30 June

Note

2016

2015



£000 

£000 





Net cash used in operating activities

16 

(14,813)

(545)





Cash flows used in investing activities




Purchase of property, plant and equipment


(1,989)

(58)

Acquisition of subsidiary

15 

(230,784)

-

Net cash used in investing activities


(232,773)

(58)





Cash flows from financing activities




Net finance (cost)/income


(1,301)

52 

Debt raising


73,700 

-

Proceeds from issue of share capital


172,869 

97,854  

Net cash from financing activities


245,268 

97,906 

Net (decrease) increase in cash and cash equivalents


(2,318)

97,303  

Cash and cash equivalents at beginning of period


7,320 

-

Cash and cash equivalents at end of period


5,002 

97,303  

 

 

Notes to the financial statements for the six months ended 30 June 2016

 

 

General Information

Non-Standard Finance plc is a public limited company incorporated and domiciled in the United Kingdom. The address of the registered office is 5th Floor, 6 St Andrew Street, London, EC4A 3AE.

 

The unaudited condensed interim financial statements do not constitute the statutory financial statements of the Group within the meaning of section 434 of the Companies Act 2006. The statutory financial statements for the period ended 31 December 2015 were approved by the Board of Directors on 4 March 2016 and have been delivered to the Registrar of Companies. The report of the auditors on those financial statements was unqualified, did not draw attention to any matters by way of emphasis and did not contain any statement under section 498(2) or (3) of the Companies Act 2006.

 

The unaudited condensed interim financial statements for the six months ended 30 June 2016 have been reviewed, not audited, and were approved by the Board of Directors on 3 August 2016.

 

1.   Basis of preparation

 

The unaudited condensed interim financial statements for the six months ended 30 June 2016 have been prepared in accordance with IAS 34 'Interim Financial Reporting' as adopted by the European Union. The unaudited condensed interim financial statements should be read in conjunction with the statutory financial statements for the period ended 31 December 2015 which have been prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.

 

The Directors have reviewed the Group's budgets, plans and cash flow forecasts for 2016 together with outline projections for the three subsequent years. Based on this review, they are satisfied that the Group has adequate resources to continue to operate for the foreseeable future. For this reason, the Directors continue to adopt the going concern basis in preparing the unaudited condensed interim financial statements.

 

2.   Accounting policies

 

The accounting policies applied in preparing the unaudited condensed interim financial statements are consistent with those used in preparing the statutory financial statements for the period ended 31 December 2015.

 

Taxes on profits in interim periods are accrued using the tax rate that will be applicable to expected total annual profits.

 

New and amended standards and interpretations need to be adopted in the first interim financial statements issued after their effective date (or date of early adoption). There are no new IFRSs or IFRICs that are effective for the first time for the six months ended 30 June 2016 which have a material impact on the Group.

 

Intangible assets

 

Intangible assets include intangibles in respect of the customer lists and agent relationships at Loans at Home and the Loans at Home brand and acquisition intangibles in respect of the customer lists, broker relationships and Credit Decisioning technology at Everyday Loans and the Everyday Loans brand.

 

The fair value of the customer lists of Loans at Home and Everyday Loans on acquisition has been estimated by calculating the Net Present Value (NPV) of the discounted cash flows from each new re-loan provided to this, discrete set of known customers. The Board of Directors will re-calculate the NPV at each future accounting date using the same assumptions, limited to the then existing customer lists.

 

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

 

The fair value of Everyday Loans' broker relationships on acquisition have been 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 Board of Directors will re-calculate the NPV at each future accounting date using the same assumptions, limited to the then existing brokers.

 

The fair value of Everyday Loans' Credit Decisioning technology on acquisition has been 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 re-value the technology using the same methodology at each future accounting date.

 

The fair value of Loans at Home's brand and Everyday Loans' brand on acquisition has been estimated by assessing the likely commercial level of royalties that would be payable to a third party were the brand licenced rather than owned, calculated as a percentage of forecast revenues and discounted to the date of the transaction. The Board of Directors will re-value the brand using the same methodology at each future accounting date.

 

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

 

 

Customer lists

Between 5 and 7 years

Agent network

20% reducing balance

Broker relationships

2 to 3 years

Credit Decisioning technology

4 years

Brand   

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.

 

Financial instruments

 

Amounts receivable from customers

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.

Recognition of incurred losses

For Loans at Home objective evidence of impairment is based on the payment performance of loans in the previous 13 weeks as this is considered to be the most appropriate indicator of credit quality. Loans are deemed to be impaired when the cumulative amount of between two and four contractual weekly payments (depending on length of relationship with the customer) have been missed in the previous 13 week period.

For Everyday Loans, the criteria that the Company uses to determine that there is objective evidence of impairment loss include, but are not limited to, the following:

·     

Delinquency in contractual payments of principal or interest;

·     

Cash flow difficulties experienced by the borrower; and

·     

Initiation of bankruptcy proceedings

 

An impairment loss is calculated by reference to arrears stages and is measured as the difference between the carrying value of the loans and the present value of estimated future cash flows discounted at the original effective interest rate. The assumptions for estimating future cash flows are based upon observed historical data and updated as management considers appropriate to reflect current and future conditions. All assumptions are reviewed regularly to take account of differences between previously estimated cash flows on impaired debt and the eventual losses.

3.   Critical accounting judgements and key sources of estimation uncertainty

 

The preparation of financial statements in conformity with generally accepted accounting practice requires management to make estimates and judgements that affect the reported amounts of assets and liabilities as well as the disclosure of contingent assets and liabilities at the year-end date and the reported amounts of revenues and expenses during the reporting period.

 

Estimates and underlying assumptions are reviewed on an ongoing basis. Revisions to accounting estimates are recognised in the period in which the estimates are revised and in any future periods affected.

 

Determination of cash generating units

For the purposes of assessing impairment, assets are grouped at the lowest levels for which there are separately identifiable cash flows (cash-generating units).  The Board of Directors consider Loans at Home, Everyday Loans and Non-Standard Finance plc (central costs), as one unit. Everyday Loans is split into two segments for segmental reporting, Everyday Loans and Trusttwo.

Impairment of goodwill

Determining whether goodwill is impaired requires an estimation of the value in use of the cash generating units (CGUs) to which goodwill has been allocated.  The value in use calculation requires the Group to estimate the future cash flows expected to arise from the CGU and apply a suitable discount rate in order to calculate the present value.

The assessment of impairment of goodwill reflects a number of key estimates, which have a material effect on the carrying value of the asset. These include:

 

·     

Cash flow forecast 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

·     

Estimates made on the disposal costs of the business.

·     

The Weighted Average Cost of Capital (WACC) applied to determine the Net Present Value (NPV) of future cash flows.

 

The nature and inherent uncertainty relating to the above judgements and estimates means that the forecast cash flows may be materially different from actual cash flows. A material future reduction in forecast surplus cash flows would necessitate a full impairment review and the possibility of a material impairment charge in future years.

 

The Group has produced a forecast to 31 December 2018 and applied three valuation approaches to establish the recoverable amount of the CGU. These were:

 

1.  

A Price/Total Net Asset Value (TNAV) multiple based on the Return on TNAV of the business, with the multiple calculated by using a regression analysis for comparable speciality finance company valuations over the last 2-years;

2.  

A Price/Earnings multiple based on the assumed Earnings Growth of the business in the following 2-years, with the multiple calculated by using a regression analysis for comparable speciality finance company valuations over the last 2-years; and

3.  

A 10-year average Price/Earnings multiple for comparable speciality finance companies.

 

Under the IAS 36 Framework both the Value in Use and Fair Value less Costs of Disposal methods can be used to assess whether impairment is required, but if the first approach used does not imply impairment it is not necessary to apply the second approach. The lowest of the three valuations was used by the Group to compare with the CGU's carrying value.  This has not resulted in any impairment of the carrying value at 30 June 2016 as the CGU's recoverable amount exceeds its carrying value.

 

Amounts receivable from customers and recognition of incurred losses

The Group reviews its portfolio of loans and receivables for impairment at each balance sheet date. For the purposes of assessing the impairment of customer loans and receivables, customers are categorised into arrears stages as this is considered to be the most reliable indication of payment performance. The Group makes judgements to determine whether there is objective evidence which indicates that there has been an adverse effect on expected future cash flows.

 

Once a loan is deemed to be impaired, judgement is required to determine the quantum and timing of cash flows that will be recovered, which are discounted to present value based on the effective interest rate (EIR) of the loan.

 

Customer accounts in Loans At Home are deemed to be impaired when between two and four contractual weekly payments (depending on length of relationship with the customer) have been missed in the previous 13 weeks. In the weekly home credit business, receivables are deemed to be impaired when the cumulative amount of two or more contractual weekly payments have been missed in the previous 13 weeks, since only at this point do the expected future cash flows from loans deteriorate significantly.

 

Customer accounts in Everyday Loans are impaired with reference to arrears stages and are measured as the difference between the carrying value of the loans and the present value of estimated future cash flows discounted at the original effective interest rate. The assumptions for estimating future cash flows are based upon observed historical data and updated as management considers appropriate to reflect current and future conditions. All assumptions are reviewed regularly to take account of differences between previously estimated cash flows on impaired debt and the eventual losses.

Fair value of acquired loan book

The fair value of the acquired loan portfolio of Loans at Home and Everyday Loans on acquisition has been estimated by discounting expected future cash flows at a rate of 20%. The WACC used by the Group for Loans at Home is 15% and for Everyday Loans (including Trusttwo) is 10%, with an additional market risk premium being added for the specific loan assets. The difference between fair value and carrying value of the loan portfolio on acquisition will be unwound to revenue in the statement of comprehensive income on an effective interest rate basis over the expected life of the acquired loans. The Board of Directors will re-value, using the same assumptions, the remaining cash flows from the loans that were in place at the time of acquisition, at each future accounting date.

 

Intangible assets - customer lists

Loans at Home's and Everyday Loans' customer lists have been allocated a fair value on acquisition as the existing customer base is an important influence on the future prospects of the business.

 

The customer lists have been valued by calculating the NPV of the discounted cash flows from each new loan sold to this discrete set of known customers. The methodology is in-line with the Group's existing valuation model used for budgeting purposes.

 

The valuation of the customer lists reflects a number of key estimates, which have a material effect on the carrying value of the asset. These include:

 

·     

Cash flow forecast 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.

·     

Estimates made on the propensity to re-loan to the customer base.

·     

The WACC applied to determine the NPV of each new re-loan.

 

The nature and inherent uncertainty relating to the above judgements and estimates means that the forecast cash flows may be materially different from actual cash flows. A material future reduction in forecast surplus cash flows would necessitate a full impairment review and the possibility of a material impairment charge in future years.

 

 

4.   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.

 


Six months ended
30 June 2016


£000 



Interest income

31,315 

Fair value unwind on acquired loan portfolio

(2,192)

Total revenue

29,123 

 

5.   Segment information

 

Management has determined the operating segments by considering the segment information that is reported internally to the chief operating decision-maker, the Board of Directors.   For management purposes, the Group is currently organised into four operating divisions Central, Loans at Home, Everyday Loans and Trusttwo. These divisions are the operating segments for which the Group reports its segment information internally to the Board of Directors.  The Group's operations are all located in the United Kingdom and all revenue is attributable to customers in the United Kingdom.

 

Six months ended 30 June

Central

 

Loans at Home

 

Everyday Loans

Trusttwo

 

Total

2016

Total

2015


£000 

£000 

£000 

£000 

£000 

£000 








Interest income

-

20,700 

10,047 

568 

31,315 

-

Fair value unwind on acquired loan portfolio

-

(213)

(1,979)

-

(2,192)

-

Total revenue

 

-

20,487 

 

8,068 

 

568 

 

29,123 

 

-

 

Operating (loss)/profit before fair value unwind, amortisation and exceptional items

(1,815)

836 

3,634 

269 

2,924 

(910)

Fair value unwind on acquired loan portfolio

-

(213)

(1,979)

-

(2,192)

(910)

Amortisation of intangible assets

(4,807)

-

-

-

(4,807)

-

Exceptional items

(626)

-

-

-

(626)

-

Operating (loss)/profit

(7,248)

623 

1,655 

269 

(4,701)

(910)

Net finance cost/(income)

(271)

(176)

(787)

(67)

(1,301)

52 

(Loss)/profit before tax

(7,519)

447 

868 

202 

(6,002)

(858)

Tax

1,377 

(89)

(164)

(40)

1,084

-

(Loss)/profit for the period

(6,142)

358 

704 

162 

(4,918)

(858)








Total assets

273,927 

33,754 

131,344 

7,598 

446,623 

97,673 

Total liabilities

(1,039)

(8,433)

(89,705)

(4,247)

(103,424)

(298)

Net assets

272,888 

25,321 

41,639 

3,351 

343,199 

97,375

Capital expenditure

159 

928 

1,083 

59 

2,229 

58 

Depreciation of plant property and equipment

14 

177 

57 

251 

2 

Amortisation of intangible assets

4,807 

-

-

-

4,807 

-

 

All inter-segment transactions are transacted on an arm's-length basis. The results of each segment have been prepared using accounting policies consistent with those of the Group as a whole.

 

6.   Loss per share

 

Six months ended 30 June

2016 

2015 




Retained loss attributable to ordinary shareholders (£'000)

 

(4,918)

 

(858)

Weighted average number of ordinary shares

294,851,859 

38,937,453 




Basic and diluted loss per share

(1.67p)

(2.20p)

 

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 basic and diluted loss per share is the same, as the exercise of share options would reduce the loss per share and therefore, is anti-dilutive.

 

Six months ended 30 June

2016 

2015 




Weighted average number of potential ordinary shares that are not currently dilutive

5,539 

5,539 

 

7.   Taxation

 

The tax charge for the period has been calculated by applying the Directors' best estimate of the effective tax rate for the financial year of 20% (2015: 20%), to the profit before tax for the period.

 

8.   Dividends

 

The Directors have declared an interim dividend in respect of the six months ended 30 June 2016 of 0.3 pence per share (2015: nil) which will amount to an estimated dividend payment of £951,000. This dividend is not reflected in the balance sheet as it will be paid after the balance sheet date.

 

9.   Goodwill


As at
30 June 2016
£000
 

Cost and net book amount

At incorporation

 

-

Acquisition of subsidiary (Loans at Home)

40,176 

At 31 December 2015

40,176 

 

Acquisition of subsidiary (Everyday Loans)

91,895 

At 30 June 2016

132,071 

The goodwill recognised represents the difference between the purchase consideration and the net assets acquired (including intangible assets recognised upon acquisition).

The Group tests goodwill annually for impairment or more frequently if there are indications that goodwill might be impaired.

The recoverable amount has been determined based on a value in use calculation.  That calculation uses cash flow projections based on financial budgets approved by management covering a period to 31 December 2018, disposal costs have been estimated at 2% and a discount rate (WACC) of 15% used on the acquisition of Loans At Home and a reduced discount rate of 10% for Everyday Loans, which takes into account the introduction of debt into the Group. The Directors have estimated the discount rate using pre-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 expected to be tax deductible.

 

10.  Intangible assets

 


Customer lists

Agent network

Brands

Broker relationships

Technology

Total

 


£000 

£000 

£000 

£000 

£000 

£000 

 

Cost







 

At 1 January 2016

17,312 

540 

297 

-

-

18,149 

 

Additions through acquisition

 

2,050 

 

-

 

1,496 

 

4,233 

 

6,227 

 

14,006 

 

At 30 June 2016

19,362 

540 

1,793 

4,233 

6,227 

32,155 

 








 

Amortisation







 

At 1 January 2016

3,869 

99 

62 

-

-

4,030 

 

Charge for the period

3,851 

129 

124 

282 

260 

4,646 

 

Impairment

-

-

161 

-

-

161 

 

At 30 June 2016

7,720 

228 

347 

282 

260 

8,837 

 








 

Net book value







 

At 30 June 2016

11,642 

312 

1,446 

3,951 

5,967 

23,318 

 








 

At 1 January 2016

13,443 

441 

235 

-

-

14,119 

 








Cost







At incorporation

-

-

-

-

-

-

Additions through acquisition

 

17,312 

 

540 

 

297 

 

-

 

-

 

18,149 

At 31 December 2015

 

17,312 

 

540 

 

297 

 

-

 

-

 

18,149 








Amortisation







At incorporation

-

-

-

-

-

-

Charge for the period

 

3,869 

 

99 

 

62 

 

-

 

-

 

4,030 

At 31 December 2015

 

3,869 

 

99 

 

62 

 

-

 

-

 

4,030 








Net book value







At 31 December 2015

 

13,443 

 

441 

 

235 

 

-

 

-

 

14,119 








At incorporation

-

-

-

-

-

-

 

 

11.  Amounts receivable from customers

 


As at

30 June

2016

As at

31 December

2015


£000 

£000 

Credit receivables

179,007 

30,335 

Loan loss provision

 (10,217)

 (1,923)

Amounts receivable from customers

168,790 

28,412 




Fair value adjustments

21,982 

426 

Loan book

146,808 

27,986 

The amounts receivable from customers were recognised at fair value (net loan book value) at the date of acquisition, see note 15 for detail.

 

Analysis of overdue receivables from customers

 


As at

30 June

2016

As at

31 December

2015


£000 

£000 

Not past due or impaired

146,033 

7,055 

Past due but not impaired

9,172 

13,538 

Impaired

13,585 

7,055 


168,790 

28,412 

 

Loans at Home past due not impaired:



One week overdue

3,173 

4,571 

Two weeks overdue

1,558 

1,696 

Three weeks or more overdue

2,051 

1,552 


6,782 

7,819 




Everyday Loans past due not impaired:



One month overdue

2,335 

-


2,335 

-




Trusttwo past due not impaired:



One month overdue

55 

-


55 

-

 

Analysis on movement on loan loss provision

 


£000 

At incorporation

-

Charge for the period

3,896 

Unwind of discount

(1,973)

At 31 December 2015

1,923 



Charge for the period

10,199 

Unwind of discount

(1,905)

At 30 June 2016

10,217 

 

The EIR used during the period to 30 June 2016 for Loans at Home was 383%, for Everyday Loans was 39.72% and for Trusttwo was 30.49%.

 

Deferred tax

 


£000 

At incorporation

-

Recognition of intangible assets at acquisition of Loans at Home

Credit for the period

(4,828)

1,771 

At 31 December 2015

(3,057)

 

Recognition of intangible assets at acquisition of Everyday Loans

Credit for the six month period

 

(7,551)

1,403 

At 30 June 2016

(9,205)


£000 

At incorporation

-

Recognition of intangible assets at acquisition of Loans at Home

(4,828)

Credit for the period

1,771 

At 31 December 2015

(3,057)



Recognition of intangible assets at acquisition of Everyday Loans

(7,551)

Credit for the six month period

1,403 

At 30 June 2016

(9,205)

 

The deferred tax liability for the six months to 30 June 2016 was recognised on the intangible assets upon acquisition of Everyday Loans. The intangible assets will be amortised in future periods for which tax deductions will not be available.

 

12.  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.

 

The Company's share capital is denominated in Sterling. The Ordinary Shares rank in full for all dividends or other distributions, made or paid on the ordinary share capital of the Company.

 

Share movements


Number



Balance at date of incorporation

-

Shares issued

105,284,445

Balance at 31 December 2015

 

105,284,445

 

Shares issued

211,765,237

Balance at 30 June 2016

317,049,682

 

13.  Reserves

 

Details of the movements in reserves are set out in the statement of changes in equity. A description of each reserve is set out below.

 

Share premium

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 £7,131,000 directly relating to raising finance have been deducted from share premium in the six months to 30 June 2016.

 


Total


£000 

Balance at date of incorporation

-

Premium arising on issue of ordinary shares

97,854  

Issue costs

(5,140)

Balance at 31 December 2015

92,714 



Premium arising on issue of ordinary shares

169,412  

Issue costs

(7,131)

Balance at 30 June 2016

254,995  

 

14.  Acquisition of subsidiary

 

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 satisfies two of Non-Standard Finance plc's target sectors, branch-based unsecured lending and guaranteed loans (Trusttwo).

 

The provisional fair values of the identifiable assets and liabilities of Everyday Loans (including Trusttwo) as at the acquisition date were as follows:

 


Amounts recognised at acquisition date

Fair value adjustments

 

Total  


£000 

£000 

£000 





Intangible assets (a)

-

14,006 

14,006 

Plant and equipment

563 

-

563 

Amounts receivable from customers (b)

115,563 

23,749 

139,312 

Trade and other receivables

4,259 

-

4,259 

Cash and cash equivalents

1,807 

-

1,807 

Trade and other payables

(7,342)

-

(7,342)

Corporation tax

(1,949)


(1,949)

Deferred tax liabilities (c)

-

(7,551)

(7,551)


112,901 

30,204 

143,105 





Goodwill



91,895 

Total consideration



235,000 





Satisfied by:




Cash



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 assets



(545)




230,784 





 

(a)

£2,050,000 has been attributed to the fair value of Everyday Loans' customer lists, £4,233,000 to the broker relationships, £1,447,000 to the Everyday Loans brand and £49,000 to Trusttwo and £6,227,000 to the technology. See intangible assets note 10.

(b)

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

(c)

Deferred tax liability £7,551,000 recognised on the intangibles and the fair value adjustment of the receivable book at acquisition

 

Everyday Loans (including Trusttwo) contributed £10,615,000 to the Group's revenue and £3,049,000 profit before tax (before fair value adjustments) to the Group's operating profit for the period from the date of acquisition to the period ended 30 June 2016.

 

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.

 

On 4 August 2015, the Group obtained control of SD Taylor Limited, trading as Loans at Home (formally Loansathome4u) through the purchase of 100% of the share capital.

 

A detailed conversion of Loans at Home's financial statements, to align accounting policies, was completed post acquisition which reduced Loans at Home's net assets on acquisition by £5,956,000, principally in respect of higher impairment provisions due to the impact of a more conservative approach to recognising impairment.

 

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

 


Amounts recognised at acquisition date

Fair value adjustments

 

Total 


£000 

£000 

£000 





Intangible assets (a)

-

18,149 

18,149 

Plant and equipment

1,627 

-

1,627 

Inventories

9 

-

9 

Amounts receivable from customers (b)

22,591 

5,882 

28,473 

Trade receivables

277 

-

277 

Cash and cash equivalents

1,296 

-

1,296 

Trade and other payables (c)

(2,040)

(732)

(2,772)

Deferred tax liabilities (d)

(22)

(4,806)

(4,828)


23,738 

18,493 

42,231 





Goodwill



40,176 

Total consideration



82,407 





Satisfied by:




Cash



82,407 





Net cash outflow arising on acquisition:




Cash consideration



82,407 

Cash and cash equivalents acquired



(1,296)

Amounts receivable from customers



81,111 





 

(a)

£17,312,000 has been attributed to the fair value of Loans at Home's customer list £540,000 to the agent network and £297,000 to the brand.

(b)

An adjustment to receivables of £5,882,000 has been made to reflect the fair value of the receivables book at the acquisition date

(c)

An adjustment of £732,000 to accruals has been made for a recognised dilapidations provision on the properties owned by Loans at Home.

(d)

£4,806,000 of deferred tax liability has been recognised on the intangibles and the fair value adjustment of the receivable book at acquisition

 

 

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.

 

15.  Net cash used in operating activities

 

Six months ended 30 June

2016

2015


£000 

£000 




Loss before interest and tax

(4,701)

(910)

Taxation paid

(1,503)

-

Depreciation

251 

2 

Amortisation of intangible assets

4,807 

-

Fair value unwind on acquired loan book

2,192 

-

Increase in amounts receivable from customers

(3,259)

-

Increase in receivables

(6,050)

(314)

(Decrease)/ increase in payables

(6,550)

677 

Cash used in operating activities

(14,813)

(545)

 

16.  Related party transactions

 

There have been no changes in the nature of related party transactions as described in note 26 to the 2015 Annual Report & Financial Statements and there have been no new related party transactions which have had a material effect on the financial position or performance of the Group in the six months ended 30 June 2016.

 

Appendix - Regulatory overview

During the first half of 2016 there have been a number of regulatory developments that may have a bearing on the Group's activities and business operations in the future. Some of the more pertinent developments are summarised below.

 

 

·     

On 26 May 2016 the FCA responded to the Competition and Markets Authority (CMA) recommendations on high-cost, short-term credit (HCSTC) and stated that it would make only minor changes to its suggested rules in this area. The new rules come into force on 1 December 2016.

·     

The FCA is monitoring the impact of the price cap imposed on HCSTC and is expected to review the current cap in 2017. The FCA has said that it believes it remains inappropriate to apply price-caps to other high cost products but intends to keep the matter under review6.

·     

On 30 June 2016 new rules on dispute resolution came into force extending the length of time that firms have to handle complaints from "next business day" to the close of business three days after the date of receipt. All complaints must be reported within three business days.

·     

As at June 2016 the FCA had authorised 30,309 firms and a further 3,544 Interim Permissions are still awaiting to complete the process. In home collected credit, 386 firms have been authorised so far.

·     

As at June 2016 the FCA had authorised 30,309 firms and a further 3,544 Interim Permissions are still awaiting to complete the process. In home collected credit, 386 firms have been authorised so far.

 

 

6 http://www.fca.org.uk/your-fca/documents/consultation-papers/cp14-10

 


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