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Non-Standard Finance PLC   -  NSF   

Preliminary announcement of 2018 full year results

Released 07:02 08-Mar-2019

RNS Number : 2839S
Non-Standard Finance PLC
08 March 2019
 

Non-Standard Finance plc

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

Preliminary announcement of full year results to 31 December 2018

8 March 2019

Financial highlights

 

•     Underlying results ahead of consensus forecasts with strong growth in operating profit in all three divisions

•     Normalised revenue2 up 39% to £166.5m (2017: £119.8m); reported revenue of £158.8m (2017: £107.8m)

•     Normalised operating profit2 (including a charge of £1.4m for deferred consideration on the acquisition of George Banco) up 51% to £35.9m (2017: £23.7m); reported operating profit of £19.5m (2017: £3.8m)

•     Normalised profit before tax2 up 12% to £14.8m (2017: £13.2m); reported loss before tax of £1.6m (2017: loss before tax of £13.0m) is after fair value adjustments, amortisation of acquired intangibles and exceptional items

•     Normalised EPS2 up 8% to 3.7p (2017: 3.4p); reported loss per share of 0.5p (2017: loss per share of 3.3p) is after fair value adjustments, amortisation of acquired intangibles and exceptional items

•     Recommended final dividend of 2.00p per share (2017: 1.70p) making a total dividend for the year of 2.60p per share (2017: 2.20p), up 18% over the prior year

•     Current trading: good start to the year and in-line with management's expectations

•     The 2018 and 2017 results are not strictly comparable as the Group acquired George Banco on 17 August 2017 and from 1 January 2018 the Group adopted IFRS 9. The Context for results set out below provides further details.

 

Operational highlights

 

•     Total net loan book1 up 29% to £310.3m with growth in all three divisions:

o Branch-based lending: up 25% with 12 new branches opened

o Guarantor Loans: up 61% with all loans now being booked onto a single loan management platform

o Home credit: up 2% with technology-driven efficiencies supporting a more streamlined operating structure 

•     Lower rate of impairment for the Group as a whole at 25.6% of normalised revenue (2017: 27.1%)1

•     Additional £70m of committed funding secured from Alcentra and RBS, making £330m in total

 

Year to 31 December

2018

2017

% change


£'000

£'000


Normalised revenue2

166,502

119,756

+39%

Reported revenue

158,824

107,771

+47%





Normalised operating profit2

35,876

23,684

+51%

Reported operating profit

19,517

3,802

+413%





Normalised profit before tax2

14,769

13,203

+12%

Reported (loss) before tax

(1,590)

 (13,021)

+88%





Normalised profit after tax2

11,572

10,890

+6%

Reported (loss) after tax

(1,679)

(10,335)

+84%





Normalised earnings per share3

3.70p

3.44p

+8%

Reported (loss) per share

(0.54)p

(3.26)p

+84%





Full year dividend per share

2.60p

2.20p

+18%

1  For reconciliation of net loan book growth see table in Financial Review.

2  See glossary of alternative performance measures and key performance indicators in the Appendix.

3  Basic and diluted earnings (loss) per share based on the weighted average number of shares in issue of 312,713,410 (2017: 316,901,254)

John van Kuffeler, Group Chief Executive Officer, said

"2018 saw the Group continue to make good progress.  It also marked the conclusion of a period of significant investment in the Group and structural change, so that we are now delivering sustained earnings growth.  The fundamental drivers of our business remain robust: we are delivering strong loan book growth whilst maintaining tight control over impairment and have high risk-adjusted margins in all three business divisions.  Having made a good start to the current year we remain confident in the full year outlook and are pleased to recommend a final dividend of 2.00p per share making 2.60p for the year as a whole (2017: 2.20p), an increase of 18% over the prior year."

Context for results

•     The 2018 and 2017 results are not strictly comparable as (i) George Banco was acquired on 17 August 2017; and (ii) from 1 January 2018 the Group adopted IFRS 9, a new accounting standard covering financial instruments that replaces IAS 39: Financial Instruments: Recognition and Measurement.

 

•     As permitted by IFRS 9, comparative information for 2017 has not been restated. Refer to notes to the financial statements for the transitional impact of IFRS 9.

 

•     The 2018 and 2017 reported results include fair value adjustments, amortisation of acquired intangibles and exceptional items relating to acquisitions. Normalised results are presented to demonstrate Group performance before these items.

 

•     Normalised operating profit in 2018 has been reduced by a £1.4m accounting charge (2017: £nil) for deferred consideration payable to vendors of George Banco that remained as employees of the Group.

 

Financial summary

 

Year ended 31 December 2018

 



Normalised4

Fair value

adjustments,

amortisation of acquired intangibles and exceptional items

Reported




£'000

£'000

£'000

Revenue



166,502

(7,678)

158,824

Other operating income



1,626

-

1,626

Modification loss



(482)

-

(482)

Impairments



(42,688)

-

(42,688)

Admin expenses



(89,082)

(8,681)

(97,763)

Operating profit



35,876

(16,359)

19,517

Exceptional items



-

-

-

Profit (loss) before interest and tax



35,876

(16,359)

19,517

Finance cost



(21,107)

-

(21,107)

Profit (loss) before tax



14,769

(16,359)

(1,590)

Taxation



(3,197)

3,108

(89)

Profit (loss) after tax



11,572

(13,251)

(1,679)







Earnings (loss) per share5



3.70p


(0.54)p

Dividend per share



2.60p


2.60p

 

Year ended 31 December 2017

 



Normalised4

Fair value

adjustments, amortisation of acquired intangibles and exceptional items

Reported




£'000

£'000

£'000

Revenue



 119,756

 (11,985)

107,771

Other operating income



1,926

-

1,926

Impairments



(28,795)

-

  (28,795)

Admin expenses



 (69,203)

 (7,897)

 (77,100)

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 share5



3.44p


 (3.26)p

Dividend per share



 2.20p


2.20p

4   See glossary of alternative performance measures and key performance indicators in the Appendix.

5  Basic and diluted earnings (loss) per share based on the weighted average number of shares in issue of 312,713,410 (2017: 316,901,254)

 

Analyst meeting, webcast, dial-in and conference call details for 8 March 2019

There will be an analyst meeting at 9.30 am on 8 March 2019 for invited UK-based analysts at the offices of Deutsche Bank, Winchester House, 1 Great Winchester Street, London, EC2N 2DB. 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 9.30 am, 8 March 2019

 

9.20 am

Please call         

08003767922 (UK)

+ 44 (0) 2071 928000 (International)   

(PIN: 9377686)

Title

NSF Full Year Results

9.30 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

Maitland/AMO

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 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, guarantor loans and home-collected credit.  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

 

2018 full year results

The Group has continued to make good progress.  Each of our chosen segments of the non-standard finance sector are delivering in-line with our plans for loan book growth whilst impairment remains under tight control.  This result was achieved despite continued investment in our branch networks, our people and our technology - a process that has been underway for the past two and a half years.  Having now completed this phase of particularly intense investment in the Group, we are well-placed to both achieve our future growth plans and deliver sustained earnings growth. 

The key operational and strategic milestones achieved during the year included:

·      Branch-based lending:

net loan book6 up 25% to £186.2m

impairment stable at 21.5%  of revenue6

12 new branches opened taking the total to 65

99 new staff added

over 1.6 million loan applications processed, up 59%

over 61,000 active customers, up 30%

·      Guarantor loans:

net loan book6 up 61% to £83.1m

rate of impairment as a percentage of revenue6 well below the market leader

over 758,000 loan applications processed, up 66%

move to a single loan management platform for new loans completed on time and on budget

added 31 new staff and moved to larger premises in Trowbridge

over 25,000 active customers, up 44%

·      Home credit:

net loan book6 up 2% to £41.0m, after 49% growth in 2017

impairment down from 37.6% to 32.6% of revenue6

93% of all new applications were processed through the new lending app (2017: 25%)

increased efficiency through a number of technology-led process improvements

more streamlined management structure in place from January 2019

·      Group

additional £70m of long-term funding now in place

recommended final dividend of 2.00p per share totalling 2.60p per share for the full year

On a like-for-like basis, the combined net loan book at 31 December 2018 increased by 29% to £310.3m, before fair value adjustments (2017: £241.2m) and to £314.6m (2017: £253.1m) after fair value adjustments.  A summary of the other key performance indicators for each of our businesses for 2018 is shown below:

 

IFRS 9 Key performance indicators6

Year ended 31 Dec 18

Branch-based lending

Guarantor loans

Home credit

Loan book growth

24.7%

61.0%

2.0%

Revenue yield

46.8%

32.2%

171.5%

Risk adjusted margin

36.7%

25.8%

115.6%

Impairments/revenue

21.5%

20.0%

32.6%

Impairments/average net loan book

10.1%

6.4%

55.9%

Operating profit margin

33.8%

35.2%

10.3%

Return on assets

15.8%

11.3%

17.7%

6    See glossary of alternative performance measures and key performance indicators in the Appendix.

A strong performance across all three divisions helped to increase normalised revenue by 39% to £166.5m (2017: £119.8m) whilst the sale of a small non-performing loan portfolio generated other operating income of £1.6m in the period (2017: £1.9m).  Despite the strong loan book growth, impairment remained under tight control and was either within or below our previous guidance. Despite higher administration costs due to the opening of new branches and a £1.4m accounting charge for deferred consideration, normalised operating profit increased by 51% to £35.9m (2017: £23.7m) reflecting the operational gearing inherent within the business.  A full year impact of the acquisition of George Banco and associated debt refinancing in August 2017 meant that interest costs doubled to £21.1m (2017: £10.5m).  As a result of these higher charges, mitigated somewhat by the benefit of share buy-backs during the year, normalised earnings per share increased by 8% to 3.70p (2017: 3.44p). 

The Group's 2018 and 2017 reported or statutory results are significantly affected by the acquisition of George Banco, fair value adjustments, the amortisation of acquired intangibles associated with the acquisitions of Everyday Loans, Loans at Home and George Banco and the adoption of IFRS 9. 

Reported revenue after fair value adjustments increased by 47% to £158.8m (2017: £107.8m) reflecting strong loan book growth and the inclusion of George Banco for a full period. Administration costs increased to £97.8m for the reasons outlined above (2017: £77.1m) together with a full period of intangibles amortisation associated with the acquisition of George Banco.  There were no exceptional items incurred during 2018 (2017: £6.3m), the prior year figure having been due to the write-off of previously capitalised fees associated with a prior period debt raising. The net result was that the reported loss before tax was £1.6m (2017: loss of £13.0m) and the reported loss per share was 0.54p (2017: loss per share of 3.26p).

The strong performance on a normalised basis and our confidence in the outlook means that the Board is recommending a final dividend of 2.00p making a total of 2.60p for the year (2017: 2.20p).  This represents a 18% increase versus last year.

 

Branch-based lending

As our largest business, the performance of Everyday Loans is a key driver of the Group's overall financial results.  The trajectory that we have seen over the last couple of years continued during 2018 and the business's unrivalled position in the market delivered record levels of revenue and operating profit.  The value of loans issued in the year increased by 28% to £149.5m (2017: £117.1m).  A slight shift in mix meant that average revenue yields also increased to 46.8% (2017: 44.0%).  However, this strong lending performance was not at the expense of a reduction in the quality of our collections, as evidenced by stable impairment as a percentage of normalised revenue of 21.5%.  The net result was that normalised operating profit (before fair value adjustments, amortisation of acquired intangibles and exceptional items) was up 19% to £27.0m (2017: £22.7m).

Our investment in a further 12 new branches and associated infrastructure during the period was a key driver behind this strong performance.  With 65 branches open at the year end, we have almost doubled the size of the network since acquiring the business in April 2016.  Our latest assessment of market demand is that we now see scope for between 100-120 branches and we plan to open somewhere between 5 and 10 branches per annum each year for the foreseeable future.  It is expected that this more modest rate of branch expansion will allow annual growth to flow through into profit more quickly. 

 

Guarantor loans

Following the acquisition of George Banco in August 2017, our guarantor loans division became our second largest and fastest growing business.  The market demand for guarantor loans shows no signs of slowing down and despite our continued investment in the integration of systems and processes, our net loan book still grew by 61% to reach £83.1m (2017: £51.6m).  Increases in both the quality and number of leads reflected our focus on improving our customer journey which is helping to increase our appeal among financial brokers.  The net result was that normalised operating profit increased more than two-fold to £7.7m (2017: £2.7m).

 

Despite having increased staff numbers significantly in 2018, we were still able to deliver productivity improvements, helping to drive business volumes further.  Now that all loans are being written on a common loan management platform, we are focused on delivering additional enhancements to our customer journey, improvements that should help drive growth in 2019 whilst maintaining a tight control on impairment.

  

Home credit

The benefits of the significant expansion that took place in 2017 continued to flow through into the 2018 full year profit performance.  As predicted at the time of the half year results in August 2018, whilst year-on-year growth slowed in the second half of 2018, the net loan book still reached £41.0m at the year-end (2017: £40.2m), an increase of 2% over the prior year.  Our continued investment in technology and systems underpinned our ability to manage this growth effectively and also helped to reduce impairment from 37.5% to 32.6% of normalised revenue.

A small shift in business mix towards larger, long-term loans meant that average revenue yield fell slightly.  However, we expect this shift to be temporary and have already begun to shorten the book with the result that yields should recover during 2019 as we return to a more normalised balance across each of our term products.  The net effect was that normalised operating profit was up 116% to £6.7m (2017: £3.1m).

Having enjoyed a period of exceptional growth during 2017 and into 2018, we now expect our home credit business to return to a more normalised, single-digit rate of annual loan book reflecting the underlying demand for home credit and further migration of customers towards the larger players, including Loans at Home.  Whilst we expect top-line growth to be modest going forward, we remain comfortable with our internal target of a long-term return on asset of at least 20% (before central costs).

 

Strategy

Whilst less than five years old, NSF is already firmly established as a leading player in three segments of the UK's non-standard finance sector with a combined net loan book of £310.3m (before fair value adjustments) and over 180,000 customers. 

Our purpose and business strategy remain unchanged.  As a Group we aim to provide affordable credit to the estimated 10 million consumers7 that because of a poor or thin credit rating, may be unable or unwilling to borrow from more mainstream lenders.  The reality is that many such consumers have few other sources of finance open to them and so we are meeting an important need, extending the availability of credit to many who might otherwise be financially excluded.

To fulfil this purpose, our business strategy has three distinct elements8:

·      to be a leader in each of our chosen segments;

·      to invest in our core assets (networks, people, technology and brands); and

·      to act responsibly.

7   L.E.K. Consulting and Company estimates.

8   For further details regarding the Group's business strategy please visit www.nsfgroupplc.com.

Each element has required significant investment over the past two and a half years, investment that is already starting to help drive revenue and operating profit in all three of our business divisions.  Each division has a top three position in its own segment of the non-standard finance market, high risk-adjusted margins and an ability to deliver sustained and long-term returns for shareholders.  This goal is underpinned by our objective to build strong, long-term relationships with our customers, something that lies at the heart of our business model.  Our preferred path to achieving this when lending direct is to meet our customers face-to-face, although we are also happy to do so through remote channels, when and if a guarantor is present. 

Such an approach is seen by some as being 'old-fashioned' and/or 'inefficient'.  Certainly the infrastructure required in the form of national networks and large numbers of well-trained people means that our model is more expensive to operate than pure online providers.  However, personal contact with our customers is an essential part of our underwriting process, one that has proven its ability to succeed whilst many digital models continue to be plagued by unsustainable rates of impairment and/or online fraud. 

In executing our business strategy, 2018 saw us conclude what has been a particularly intense period of investment and structural change in the Group, details of which are set out in each of the divisional reports within the 2018 Financial Review below.  More normalised levels of investment in the Group going forward mean that we are well-placed to reap the rewards of our investment to-date and to deliver sustained earnings growth. 

 

Offer to acquire Provident Financial plc

In keeping with the Group's strategy, on 22 February 2019 the Company announced a firm offer to acquire Provident Financial plc ('Provident') by way of a reverse takeover offer (the 'Offer') with each Provident Shareholder entitled to receive 8.88 new NSF Shares for each Provident Share under the terms of the offer, as well as the proposed demerger of the Loans at Home Business (the 'Demerger').

NSF intends to capitalise on its operational and commercial success by acquiring and transforming Provident to unlock substantial value for all shareholders of, and stakeholders in, both Provident and NSF. The Offer, once complete is expected to create a well-balanced group with leading positions in some of the most attractive segments of the non-standard finance sector. NSF believes the transaction will reposition and revitalise Provident's businesses and their respective product offerings within the non-standard finance sector, enhancing their prospects for profitable growth. Under the leadership of the NSF Board and NSF's strong management team, the transaction also represents an opportunity to unlock substantial value from an enlarged customer base in a highly specialised sector.

Whilst Provident is one of the leading providers of personal credit products to the non-standard credit market in the UK, it has faced a number of challenges in the recent past. However, the NSF Board believes Provident continues to have significant potential which, under the right leadership and pursuing a revised business strategy, can be unlocked for the benefit of shareholders, employees and customers of both NSF and Provident.

As part of the transaction, NSF intends to complete a demerger of its home credit business, Loans at Home, to assist with the Competition and Markets Authority ('CMA') competition approval process and for Loans at Home to be admitted to trading either on the Main Market (with a standard listing) or on AIM. Although the timing and structure of the Demerger remain subject to further consideration, including by the CMA, it is expected that the Demerger will take place following Completion, thereby allowing Provident Shareholders who participate in the transaction, as well as existing NSF Shareholders, to receive shares in the newly-listed Loans at Home. The NSF Board considers that Loans at Home is, and will continue to be, a viable, well-managed, independent, standalone business. As the Demerger remains subject to review by the CMA, NSF has reserved the right to change its strategic plans with respect to Loans at Home as described in the Offer announcement, including (without limitation) the timing of the Demerger.

As noted in note 10 to the Financial Statements, the carrying value of goodwill generated on the acquisition of Loans at Home in 2015 was an area of particular focus for the 2018 audit and the Group has used current market multiples and budgeted 2019 profits to estimate the value of Loans at Home.  This confirms that Loans at Home continues to exceed the carrying value of its tangible net assets and goodwill, albeit by a significantly smaller margin than at the end of 2017. As the market value of Loans at Home at the point of the expected Demerger will be a function of a broad range of factors at that time, the value of Loans at Home as a separately listed company may differ from that assessed at 31 December 2018 and that difference could result in a lower or higher value for Loans at Home at the point of Demerger.  Any such movement which results in a lower value for Loans at Home is not, however, expected to outweigh the considerable benefit of the Offer for the Enlarged Group's shareholders or undermine the accuracy of the internal value calculation described above.

NSF has received irrevocable undertakings to accept the Offer and letters of intent to accept (or procure acceptance of) the Offer in respect of, in aggregate, 49.4 per cent. of Provident's issued share capital.

The Offer is subject to a number of conditions that include approval of the issuance of the New NSF Shares by NSF Shareholders, receipt of approvals from the Financial Conduct Authority ('FCA'), the Prudential Regulatory Authority and the Central Bank of Ireland, receipt of approval from the CMA and other conditions and further terms.  

Further details of the Transaction can be found in the Offer announcement published by the Company on 22 February 2019, which can be found on the Group's website, www.nsfgroupplc.com.

 

Funding

The Group secured a further £70m of additional debt funding in August 2018 on similar terms to the then existing arrangements.  As a result, the Group now has total committed debt facilities of £330m.

The facilities now comprise a £285m term loan facility (the 'Term Loan'), provided by a group of institutional investors, led by Alcentra Limited. The Term Loan, which is not repayable until August 2023, bears an interest rate of LIBOR plus 7.25% per year with interest payable every six months. In addition, the Group has a £45m revolving credit facility provided by Royal Bank of Scotland at an interest rate of LIBOR plus 3.5% per year.

As at 31 December 2018 the Group had cash at bank of £13.9m (2017: £11.0m) and gross borrowings of £272.8m (2017: £208.1m) leaving total headroom on the Group's debt facilities of £57.2m (2017: £51.9m). 

We are exploring a range of possible long-term debt financing options for the Group and will provide further updates as and when appropriate.

 

Regulation

After an extensive investigation into the high-cost credit market, including home credit, the regulator published their final rules and guidance9 in December 2018.  The operational changes required are not expected to have a material impact on our home credit business and we expect all changes to be fully embedded before the end of March 2019.

9   FCA - CP18/43 High-cost Credit Review: Feedback on CP18/12 with final rules and guidance and consultation on Buy Now Pay Later offers.

Through our FCA contacts during 2018 we believe we have established a good working relationship with the regulator at both an operational as well as a strategic level.

We continue to monitor all regulatory developments closely and where appropriate, will participate fully in any related consultations or debate.  We are also ready to implement any appropriate measures that can further improve the delivery of great outcomes for our customers or that may be deemed necessary.  We remain on track to implement the requirements of the forthcoming Senior Managers and Certification Regime when it comes into force during the second half of 2019. 

For further details regarding the latest regulatory developments, please visit the Company's corporate website: www.nsfgroupplc.com.

 

Final dividend

Having declared a half-year dividend of 0.6p per share in August 2018 (2017: 0.5p), the Board is recommending a final dividend of 2.00p per share (2017: 1.70p), making a total of 2.60p for the year as a whole (2017: 2.20p).

If approved at the Company's Annual General Meeting on 1 May 2019, the final dividend would be paid to those shareholders on the Company's share register on 3 May 2019 (the 'Record Date'), with payment being made on 7 June 2019.

 

Possible implications of Brexit

Employment in the UK remains at an all-time high and real earnings growth is recovering, albeit slowly, factors that bode well for our customer base.  Whilst macroeconomic and political uncertainty surrounding the possible implications of Brexit remain significant, we have not seen any notable effect on our business to-date and past recessions have demonstrated the contra-cyclical character of the non-standard market. 

 

Going concern statement

The Directors have carried out a robust assessment of the principal risks facing the Company, including those that could threaten its business model, future performance, solvency or liquidity. On this basis, the Directors consider it appropriate to adopt the going concern basis in preparing the Company's financial statements. The Directors will continue to monitor the Company's risk management and internal control systems.

 

Current trading and outlook

2019 has started well with loan book growth in line with plan and impairment tightly controlled. 

As evidenced by our recommended increase in the final dividend, we remain positive about the Group's full year prospects and look forward with confidence.

 

John van Kuffeler

Group Chief Executive

 

8 March 2019

 

2018 FINANCIAL REVIEW

 

Group results

The Group results for the year ended 31 December 2018 include a full period of George Banco that was acquired on 17 August 2017. The prior year reported figure included approximately four months' performance from George Banco.

Normalised figures are before fair value adjustments, the amortisation of acquired intangibles and exceptional items. The 2018 and 2017 results are not strictly comparable as (i) George Banco was acquired on 17 August 2017; and (ii) from 1 January 2018 the Group adopted IFRS 9, a new accounting standard covering financial instruments that replaces IAS 39: Financial Instruments: Recognition and Measurement.

 

Year ended 31 December

 


2018

Normalised10

2018

Fair value

adjustments,

amortisation of acquired

intangibles and exceptional items

2018

 



£'000

£'000

£'000

Revenue


166,502

(7,678)

158,824

Other operating income


1,626

-

1,626

Modification loss


(482)

-

(482)

Impairments


(42,688)

-

(42,688)

Admin expenses


(89,082)

(8,681)

(97,763)

Operating profit


35,876

(16,359)

19,517

Exceptional items


-

-

-

Profit (loss) before interest and tax


35,876

(16,359)

19,517

Finance cost


(21,107)

-

(21,107)

Profit (loss) before tax


14,769

(16,359)

(1,590)

Taxation


(3,197)

3,108

(89)

Profit (loss) after tax


11,572

(13,251)

(1,679)






Earnings (loss) per share


3.70p


(0.54)p

Dividend per share


2.60p


2.60p

 

Period ended 31 December

 


2017

Normalised10

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


 (69,203)

 (7,897)

 (77,100)

Operating profit (loss)


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

10                    See glossary of alternative performance measures and key performance indicators in the Appendix.

Normalised revenue was up 39% to £166.5m (2017: £119.8m) reflecting strong loan book growth and a full year's contribution from George Banco.  Despite the inclusion of a full year fair value adjustment to revenue for George Banco for the first time, a reduced adjustment for both Everyday Loans and Loans at Home in 2018 meant that reported revenue increased by 47% to £158.8m (2017: £107.8m).  Whilst underlying growth and associated infrastructure investment resulted in a marked uplift in administration costs (that also included an accounting charge of £1.4m for deferred consideration associated with the acquisition of George Banco), normalised operating profit rose by 51% to £35.9m (2017: £23.7m).   This was driven by strong loan book growth and careful management of both impairment and administration costs. A full period of George Banco meant that the reported operating profit was up four-fold to £19.5m (2017: £3.8m). There were no exceptional items incurred during 2018 (2017: £6.3m), the prior year having 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 significantly to £21.1m (2017: £10.5m) due to increased levels of borrowing and the higher borrowing cost of the Group's new debt arrangements.

The net result was that the Group reported a much reduced reported loss before tax of £1.6m (2017: loss of £13.0m). The tax charge of £0.1m (2017: credit of £2.7m) meant that the Group reported a loss after tax of £1.7m (2017: £10.3m) equating to a reported loss per share of 0.54p (2017: loss per share of 3.26p).

A detailed review of each of the operating businesses' normalised results are set out below.

 

Normalised divisional results

The table below provides an analysis of the 'normalised' results for the Group for the twelve month period to 31 December 2018.  Management believes that by removing the impact of non-cash and other accounting adjustments, the normalised results provide a clearer view of the underlying performance of the Group.  Note that the 2017 results include four months' contribution from George Banco that was acquired on 17 August 2017 and have not been restated to reflect the adoption of IFRS 9, a new accounting standard covering financial instruments that replaces IAS 39: Financial Instruments: Recognition and Measurement (see note 3 to the Financial Statements).

 

Year ended 31 Dec 2018

Normalised11

Branch-based lending

Guarantor loans

Home

credit

Central costs

NSF plc

 


£'000

£'000

£'000

£'000

£'000

Revenue

79,579

21,748

65,175

-

166,502

Other operating income

1,397

229

-

-

1,626

Modification loss

(482)

-

-

-

(482)

Impairments

(17,099)

(4,342)

(21,247)

-

(42,688)

Revenue less impairments

63,395

17,635

43,928

-

124,958

Admin expenses

(36,488)

(9,983)

(37,214)

(5,397)

(89,082)

Operating profit

26,907

7,652

6,714

(5,397)

35,876

Finance cost

(12,778)

(5,833)

(2,461)

(35)

(21,107)

Profit before tax

14,129

1,819

4,253

(5,432)

14,769

Taxation

(2,612)

(645)

(774)

834

(3,197)

Profit after tax

11,517

1,174

3,479

(4,598)

11,572







Normalised earnings per share





3.70p

Dividend per share





2.60p

 

Year ended 31 Dec 2017

Normalised11

Branch-based lending

Guarantor loans

Home

credit

Central costs

 

NSF plc

 


£'000

£'000

£'000

£'000

£'000

Revenue

60,937

8,078

50,741

-

119,756

Other operating income

1,926

-

-

-

1,926

Impairments

 (11,654)

 (1,365)

 (15,776)

-

 (28,795)

Revenue less impairments

51,209

6,713

34,965

-

92,887

Admin expenses

 (28,555)

 (3,965)

 (31,863)

 (4,820)

 (69,203)

Operating profit

22,654

2,748

3,102

 (4,820)

23,684

Finance cost

 (7,051)

 (2,029)

 (1,299)

 (102)

 (10,481)

Profit before tax

15,603

719

1,803

 (4,922)

13,203

Taxation

 (3,146)

 (130)

 88

875

 (2,313)

Profit after tax

12,457

589

1,891

 (4,047)

10,890







Normalised earnings per share





3.44p

Dividend per share





2.20p

11                    See glossary of alternative performance measures and key performance indicators in the Appendix.

 

Reconciliation of net loan book

Under IFRS 9

2018

Normalised

2018

Fair value
adjustments

2018

Reported

2017

Normalised

2017

Fair value
adjustments

2017

Reported


£m

£m

£m

£m

£m

£m

Branch-based lending

186.2

-

186.2

149.4

4.0

153.4

Guarantor loans

83.1

4.3

87.4

51.6

8.0

59.6

Home credit

41.0

-

41.0

40.2

-

40.2

Total

310.3

4.3

314.6

241.2

12.0

253.1

 

Divisional overview

Branch-based lending

Established over 12 years ago, Everyday Loans is now the only significant branch-based provider of unsecured loans in the UK's non-standard finance sector.  Since becoming part of NSF in 2016, the business has undergone significant investment and structural change, including the rapid expansion of its branch network and investment in the requisite infrastructure to support a much larger and faster growing business. The branch network has almost doubled under our ownership with 65 branches now open across the UK at the end of 2018.  This increased capacity has helped to grow the active customer base which rose by 30% in 2018 to 61,200 (2017: 47,000) as well as the net loan book, up 25% to £186.2m (2017: £149.4m).  Key drivers for the business include network capacity, lead volume and quality, network productivity and tight management of impairment.  A summary of our progress on each of these drivers is highlighted below. 

Network capacity - For a new branch to succeed we look for areas of population with at least 70,000 adults matching our desired customer type.  In areas with sufficient lead volumes, an additional branch or headcount means we can start to convert more leads into loans. Whilst the up-front investment and associated infrastructure costs mean that new branches typically take 11-12 months to break-even, within three to five years of opening we would expect a mature branch to generate annual operating profit of between £0.8m and £1.0m, before central costs.  Our most successful branch is already generating profits above this range, providing a real-life example of what can and is being achieved.  As well as increasing our overall capacity, additional branches can also help to increase conversion by reducing the distance that customers have to travel to a branch and by reducing the time taken by the network to respond to an application. 

Lead volumes and quality - As well as increasing capacity with more branches, we also sought to ensure a continued flow of high-quality leads, that once through our initial screening criteria, can be passed on to the branch network.  Having processed over 1 million leads in 2017, this increased to over 1.6 million in 2018, an increase of 59%.  The majority of this increase came from a concerted effort to deepen our relationship with a discrete number of financial brokers.  While the scale of this increase meant that there was a reduction in quality, the number of new borrower applications sent to branch ('ATBs') increased by 17% to 366,000 (2017: 313,700).

Productivity - Opening branches tends to reduce average productivity in the short-term as a new branch tends to be sub-scale in terms of numbers of customers and size of loan book and also because new staff take time to match the performance of their more experienced colleagues.  We aim to minimise this risk by recruiting new managers from within the network and through a rigorous recruitment process for more junior staff followed by an intensive induction and training programme - the objective being that when a new staff member arrives in the branch, they are able to write and process a new loan application and can contribute from day one.  During 2018 we wrote 37% more loans than in 2017 reaching 44,841 in total (2017: 32,668), and achieved an improved conversion rate on new borrower applications to branch of 9.0% (2017: 7.3%).

Delinquency management - With 12 years of customer data, across a broad range of customer types, Everyday Loans has developed a highly robust underwriting process, evidenced by an impressive track record of managing impairment within a tight range since the financial crisis. Having augmented our collections tools and improved our overall contact strategy during 2018, impairment as a percentage of average net receivables increased slightly to 10.1% (2017: 9.5%) but remained stable relative to normalised revenue remained stable at 21.5% (2017: 21.5%).  Whilst we continue to seek further improvements in impairment, we are being careful to ensure that any reductions are not at the expense of business volume, overall profitability or the delivery of good customer outcomes.

2018 results

Normalised revenue increased by 31% to £79.6m (2017: £60.9m) driven by the increased capacity and lead volumes outlined above as well as by an improved performance from branches opened in 2016 and 2017. Fair value adjustments to revenue reduced to £4.0m (2017: £11.9m) resulting in reported revenue of £75.6m (2017: £49.1m). A change in the way that rescheduled loans are accounted for resulted in a small increase to revenue, off-set by a modification loss of £0.5m (2017: £nil).   Other operating income of £1.4m (2017: £1.9m) arose from the sale of a small, non-performing loan portfolio.  While increased business volumes meant that the absolute level of impairments increased under IFRS 9 to £17.1m (2017: £11.7m), on a like-for-like basis, the rate of impairment as a percentage of normalised revenue declined versus the prior year and remains well within our previous guidance of 20-22% - see glossary of alternative performance measures and key performance indicators in the Appendix.

Opening 12 new branches required significant investment, in premises and associated infrastructure as well as on the recruitment and training of new staff.  This rate of expansion was a drag on profit growth in 2018, something that should not be repeated with our more modest plan for seven new branches in 2019.  The total number of full-time employees at the year-end was 406 (2017: 307), an increase of 32%.  As a result, administrative expenses increased to £36.5m (2017: £28.6m) equivalent to 46% of normalised revenue (2017: 47%).  The net impact of all of these movements was that normalised operating profit increased by 19% to £27.0m (2017: £22.7m) while reduced amortisation charges meant that reported operating profit increased by 112% to £22.9m (2017: £10.8m).  There were no exceptional costs incurred in 2018 (2017: £5.3m) while the prior year total related to the refinancing of the Everyday Loans bank facilities and restructuring costs.

Higher finance costs of £12.8m (2017: £7.1m) were driven by strong loan book growth and a full year's impact of the increased average cost of the Group's new debt arrangements with the net result that normalised profit before tax decreased by 10% to £14.1m (2017: £15.6m).  The absence of any amortisation of acquired intangibles meant that reported profit before tax increased substantially to £10.2m (2017: loss of £1.6m).

 

Year ended 31 December

 

 

2018

Normalised11

 

2018

Fair value adjustments and exceptional items

2018

Reported

 


£'000

£'000

£'000

Revenue

79,579

(3,958)

75,621

Other operating income

1,397

-

1,397

Modification loss

(482)

-

(482)

Impairments

(17,099)

-

(17,099)

Revenue less impairments

63,395

(3,958)

59,437

Admin expenses

(36,488)

-

(36,488)

Operating profit

26,907

(3,958)

22,949

Exceptional items

-

-

-

Profit before interest and tax

26,907

(3,958)

22,949

Finance cost

(12,778)

-

(12,778)

Profit before tax

14,129

(3,958)

10,171

Taxation

(2,612)

752

(1,860)

Profit after tax

11,517

(3,206)

8,311

 




 

Year ended 31 December

 

 

2017

Normalised11

 

2017

Fair value adjustments, amortisation of acquired intangibles 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)

 




11                    See glossary of alternative performance measures and key performance indicators in the Appendix.

 

IFRS 9 key performance indicators

With little change to the shape of the loan book, there was only a slight change in revenue yield which increased to 46.8% (2017: 44.0%) and so revenue growth was driven largely by loan book growth.  As noted above, despite strong growth in the loan book and an influx of new staff, the strength of our underwriting and collections processes meant that impairment remained under tight control at 21.5% of revenue (2017: 21.5%), feeding through into an increased risk adjusted margin of 36.7% (2017: 34.6%). 

The investment in 12 new branches together with associated costs of recruitment, training and other costs meant that the normalised operating profit margin was slightly lower at 33.8% (2017: 34.8%) but the return on asset increased to 15.8% (2017: 15.3%).

Year ended 31 December

 

IFRS 9 Key Performance Indicators12

2018

Normalised

 

2017

Normalised

 

Number of branches

65

53

Period end customer numbers (000)

61.2

47.0

Period end loan book (£m)

186.2

149.4

Average loan book (£m)

170.0

138.3

Revenue yield (%)

46.8

44.0

Risk adjusted margin (%)

36.7

34.6

Impairments/revenue (%)

21.5

21.5

Impairment/average loan book (%)

10.1

9.5

Operating profit margin (%)

33.8

34.8

Return on asset (%)

15.8

15.3

12                    See glossary of alternative performance measures and key performance indicators in the Appendix.

Plans for 2019

The fundamentals are positive with the demand for non-standard credit continuing to be strong: there are very few profitable direct competitors and no other branch-based lenders seeking to reach our customers, and the Group has access to significant long-term debt funding.  Our plan for 2019 is to continue to drive loan book growth whilst retaining a tight grip on impairment by executing the following initiatives:

Branch openings - we now see an opportunity to have somewhere between 100 and 120 branches over the next five years.  Having opened 29 new branches since April 2016, we plan to expand at a more modest rate than in the past thereby allowing the benefit of annual growth to flow through to profits more quickly.  We expect to open somewhere between five and ten branches each year for the foreseeable future and have identified seven new branches to open during the first half of 2019.

Lead management - we processed over 1.6 million leads in 2018, an increase of 59% versus 2017.  Thanks in part to our own efforts, the broker channel provided the bulk of this increase and whilst we believe that there is scope to grow broker volumes further, we are also focused on continuing to grow volumes across other channels whilst ensuring we maintain a tight control on the quality and cost of customer acquisition. 

Productivity gains - our bespoke recruitment, induction and training programmes have been invaluable in helping to maintain productivity during a period of rapid expansion.  We will continue to seek productivity gains through additional training and sharing of best practice, improved management information and systems and by greater automation/centralisation of certain administration tasks in the branches.  Having added 176 new staff since 2016, we will look to extract further productivity gains from them in 2019 as their collective performance improves with greater experience, bolstered by additional training.

Delinquency management - further enhancements to our contact strategy and the roll-out of a customer-led automated payments system across the network should both help to maintain our strong delinquency performance.

The Offer to acquire Provident, if successful, is expected to provide significant opportunities for our branch-based lending business.  Further details can be found in the Offer announcement issued on 22 February 2019 which is available on the Group's website, www.nsfgroupplc.com.

 

Guarantor loans

Our guarantor loans division made excellent progress in 2018, driven by strong demand and an improved operational performance.  The size of the UK guarantor loans market is continuing to grow rapidly and L.E.K. Consulting estimates that the value of outstanding net receivables at the end of 2017 had reached £658m, a compound annual growth rate of 37.5% since 2014.  Whilst estimates for the size of the market in 2018 are not yet available, taking the size of our own net loan book and that of the market leader at the end of December 2018 would imply it is now likely to be closer to £1 billion.

Most customers apply online, often via a broker, or by phone.  However, unlike our other two divisions, the presence of a guarantor means we are happy to lend to a customer without first meeting them face-to-face.  After having passed an initial credit check, both borrower and guarantor are contacted by phone and each is assessed for their creditworthiness and ability to afford the loan.  In addition, the guarantor's role and responsibilities are clearly explained and recorded.  This is to ensure that while the borrower is primarily responsible for making the repayments, both the borrower and the guarantor (in the event of default) are both clear about their obligations and are also capable of repaying the loan. The presence of a suitable guarantor means that, in most circumstances, an applicant with a thin or impaired credit file is able to borrow at a much lower rate of interest than if they had taken out the loan on their own.

Loan volumes increased by 71% to £65m (2017: £38m) whilst the quality of leads improved with an increasing proportion of leads passing through our internal scorecard (32% were approved in principle versus 27% in 2017).  This helped to improve our conversion rate of applications into loans.  Our continued investment in training and systems were key factors in this effort and conversion increased as a result with a record number of 17,393 loans written for a total value of £65m during the year (2017: 10,766 loans and £38m respectively). We continued to maintain a healthy balance between new and existing customers of approximately 64:36 (2017: 62:38) with the result that customer numbers grew by 44% to 25,100 (2017: 17,400).

This was delivered whilst at the same time achieving a number of operational milestones. 

Move to a single loan management platform - all new loans for both George Banco and TrustTwo are now being written onto one platform, a complex but important step that has improved the quality of management information and over time will result in cost savings.

Development of a more tailored customer journey - with a single loan management system in place we can now begin the final step towards our target operating model: a seamless lending and collecting process across both brands using a common lending approach but tailored for different customer journeys depending on a variety of factors such as channel, risk profile of the applicant and guarantor and the size of the loan.  This should be in place during 2019.

Maintain a well-balanced channel mix - we have continued to build on the Group's existing relationships to help maintain a strong presence in the important broker market whilst also ensuring a healthy balance of leads and loans written through other channels.

New premises in Trowbridge - George Banco moved to new premises in Trowbridge in October 2018.  The new office, which was secured at a reduced cost from the previous location, has provided additional capacity for further expansion.

Harmonised collections - having centralised our collections expertise in Trowbridge during the fourth quarter of 2018 we now have a consistent approach across both brands and hope that this may help as we strive to extract some improvements in delinquency performance in 2019.

The result was that the net loan book increased by 61% to reach £83.1m at 31 December 2018 (2017: £51.6m).  This was well ahead of our internal target of 20% annual loan book growth and represents a total increase of over 90% since we acquired George Banco in August 2017. 

 

2018 results

The results for 2018 and 2017 are not strictly comparable as 2018 includes a full period of George Banco while the 2017 results include four and a half months of George Banco which was acquired on 17 August 2017.  In addition, the 2017 results have not been restated for the introduction of IFRS 9 which was adopted from 1 January 2018.

Significant loan book growth, together with a full period's contribution from George Banco meant that normalised revenue increased by 169% to £21.7m (2017: £8.1m).  Reported revenue was impacted by a marked increase in the fair value adjustment to revenue reflecting a full period of the fair value unwind that totalled £3.7m (2017: £0.1m). 

A full period of George Banco expenses, including an accounting charge for deferred consideration payable to vendors who remained as employees of George Banco of £1.4m (2017: £nil), the addition of 31 new staff and increased lending volumes together meant that administration costs increased to £10.0m (2017: £4.0m) with the result that normalised operating profit increased to £7.7m (2017: £2.7m). 

Higher finance costs of £5.8m (2017: £2.0m) were driven by strong loan book growth and the impact for a full period of the terms of the new debt arrangements that were put in place at the time of the George Banco acquisition.  The net result was that normalised profit before tax reached £1.8m (2017: £0.7m).  The absence of any exceptional items (2017: £0.2m) meant that reported loss before tax was £1.9m (2017: profit of £0.4m) as a result of the £3.7m fair value unwind that reduced reported revenue (2017: nil).

 

 

Year ended 31 December

 

 

2018

Normalised13

 

 

 

£'000

2018

Fair value

adjustments and

 Exceptional

items

£'000

2018

Reported

 

 

 

£'000

Revenue

21,748

(3,720)

18,028

Other income

229

-

229

Impairments

(4,342)

-

(4,342)

Revenue less cost of sales

17,635

(3,720)

13,915

Admin expenses

(9,983)

-

(9,983)

Operating profit

7,652

(3,720)

3,932

Exceptional items

-

-

-

Profit before interest and tax

7,652

(3,720)

3,932

Finance cost

(5,833)

-

(5,833)

Profit/(loss) before tax

1,819

(3,720)

(1,901)

Taxation

(645)

707

62

Profit/(loss) after tax

1,174

(3,013)

(1,839)





 

Year ended 31 December



2017

Normalised13

2017

Fair value adjustments and exceptional items

2017

Reported




£'000

£'000

£'000

Revenue



8,078

(111)

7,967

Impairments



(1,365)

-

(1,365)

Revenue less impairments



6,713

(111)

6,602

Admin expenses



(3,965)

-

(3,965)

Operating profit



2,748

(111)

2,637

Exceptional items



-

(230)

(230)

Profit before interest and tax



2,748

(341)

2,407

Finance cost



(2,029)

-

(2,029)

Profit before tax



719

(341)

378

Taxation



(130)

65

(65)

Profit after tax



589

(276)

313







13  See glossary of alternative performance measures and key performance indicators in the Appendix.

 

IFRS 9 Key performance indicators

Even though George Banco was not acquired until 17 August 2017, the 2017 KPIs below have been adjusted to include George Banco for a full 12 months.  A shift in business mix resulted in a small decrease in revenue yield and in risk adjusted margin that reduced to 25.8% (2017: 29.3%).  The strong rate of growth and continued investment in the business resulted in a return on assets of 11.3% which was down on the previous year but we remain confident that our medium-term target of 20% can be reached as the business continues to grow strongly.

 

Year ended 31 December

 

IFRS 9 Key Performance Indicators14

2018

Normalised

 

2017

Normalised

 

Period end customer numbers (000)

25.1

17.4

 

Period end loan book (£m)

83.1

51.6

 

Average loan book (£m)

67.6

42.4

 

Revenue yield (%)

32.2

34.7

 

Risk adjusted margin (%)

25.8

29.3

 

Impairment/revenue (%)

20.0

15.5

 

Impairment/average loan book (%)

6.4

5.4

 

Operating profit margin (%)

35.2

37.8

 

Return on assets (%)

11.3

13.1

 

14                    See glossary of alternative performance measures and key performance indicators in the Appendix.

 

Plans for 2019 

The following initiatives are already underway for 2019:

Complete transition to target operating model - with a single loan management platform in place we have begun to implement a common booking interface for both brands.  This will, inter alia, enable any of our customer account managers to be able to complete a loan transaction for either of our two brands (or indeed additional brands should we decide to introduce them) and from either of our two locations, making it much easier to optimise staffing levels.  The new front end will also provide a single, detailed view of all KPIs across both brands, enabling the ability to fine-tune all aspects of the customer journey in real-time.

Increase capacity - with space now available for up to 40 additional staff across both our locations in Trowbridge and Bourne End, we plan to continue to increase headcount, in-line with business volumes.

Further productivity improvements - as well as increased capacity from more staff, we also believe that there is scope to drive additional volume as a result of further productivity improvements from a variety of initiatives such as better use of technology, increased training and sharing of best practice.

New products - we are exploring the opportunity for a more flexible, risk-based pricing approach - one that will broaden our product offering and increase the size of our potential customer pool.

We have a strong position in the market, one that is growing quickly.  As we continue to build scale and take market share, we remain on track to meet our target of 20% annual loan book growth and a 20% return on assets.

The Offer to acquire Provident, if successful, is expected to provide significant opportunities for our guarantor loans business.  Further details can be found in the Offer announcement issued on 22 February 2019 which is available on the Group's website, www.nsfgroupplc.com.

 

Home credit

The past two years have seen an unprecedented period of structural change in the home credit industry following a major restructuring at the market leader in 2017, the effects of which continued to resonate in 2018.  At the same time, we were transforming our business through a significant investment in technology, one that has improved both our lending and collections process as well as enhanced the reliability and security of our IT infrastructure. 

The financial impact of having recruited a large number of highly experienced self-employed agents and management staff in 2017 rolled through into 2018.  We ended the year with 897 agencies (2017: 1,005), a decrease from the previous year, reflecting a return to the natural rate of agent attrition and our focus on removing agencies that were sub-scale.  However, as newly recruited agents sought to increase the size of their individual loan portfolios, the size of the net loan book (before fair value adjustments) at 31 December 2018 was £41.0m, up 2.0% versus the previous year (2017: £40.2m).

Our transition away from a purely paper-based lending and collections-based process to one that can now be done entirely using an agent's mobile device is now complete such that 98% of all loans are now processed using the lending app.  During 2018 we enhanced the suite of applications that are helping to improve productivity and enhance management control and oversight.  This included the automation of a series of previously manual processes, freeing up managers to spend more time with agents and focus on customer-related issues.  We also developed the Journey Management Performance Report (or 'JMPR') that provides a range of real-time performance metrics on every individual customer and for every agent, by location and region.  This new tool has become an invaluable aid for managers, enabling them to identify any customer issues at a granular level and then address them much more quickly. 

As well as improving our operational procedures and performance, we have also significantly de-risked our technology infrastructure having migrated our previous data centre to Microsoft Azure.  This cloud-based solution has unlocked a series of new capabilities for future technologies, reduced costs and provided much greater protection for our data. 

 

2018 results

Normalised revenue increased by 28% to £65.2m (2017: £50.7m) and there was no adjustment for reported revenue as the unwind of the fair value adjustment made to the carrying value of the loan book at acquisition in 2015 is now complete.

Higher impairment of £21.2m (2017: £15.8m) reflected the move to IFRS 9 as well as the growth in the net loan book but at 32.6% of normalised revenue was below our guided range of 33-37%.  Increased administration costs reflected the full year impact of the expansion undertaken in 2017 and the average number of staff in 2018 was up 18% at 361 (2017: 305), we ended the year with a total of 331 staff (2017: 350) as we sought to right-size our infrastructure following a period of rapid expansion.  Normalised operating profit increased by 116% to £6.7m (2017: £3.1m), benefiting from the significant reduction in temporary additional commission that had been paid to newly recruited agents during 2017, despite the impact of IFRS 9. 

There were no exceptional costs in the year, the figure for the prior year arose from the refinancing of the Loans at Home bank facility.  The net result was that normalised profit before tax increased by 138% to £4.3m (2017: £1.8m).  Increased finance costs of £2.5m (2017: £1.3m), reflected the growth in loan book and a full year impact of the increased cost of the Group's long-term debt arrangements that were put in place in August 2017.  

 

Year ended 31 December



2018

Normalised15

2018

Fair value adjustments and exceptional items

2018

Reported




£'000

£'000

£'000

Revenue



65,175

-

65,175

Impairments



(21,247)

-

(21,247)

Revenue less impairments



43,928

-

43,928

Admin expenses



(37,214)

-

(37,214)

Operating profit



6,714

-

6,714

Exceptional items



-

-

-

Profit before interest and tax



6,714

-

6,714

Finance cost



(2,461)

-

(2,461)

Profit before tax



4,253

-

4,253

Taxation



(774)

-

(774)

Profit after tax



3,479

-

3,479







 

Year ended 31 December



2017

Normalised15

2017

Fair value adjustments and exceptional items

2017

Reported




£'000

£'000

£'000

Revenue



50,741

-

50,741

Impairments



 (15,776)

-

 (15,776)

Revenue less impairments



34,965

-

34,965

Admin expenses



 (31,863)

-

 (31,863)

Operating profit



3,102

-

3,102

Exceptional items



-

 (467)

 (467)

Profit before interest and tax



3,102

 (467)

2,635

Finance cost



 (1,299)

-

 (1,299)

Profit before tax



1,803

 (467)

1,336

Taxation



88

91

 179

Profit after tax



1,891

 (376)

1,515







15 See glossary of alternative performance measures and key performance indicators in the Appendix.

 

IFRS 9 key performance indicators

The increased number of quality customers taking out larger, longer-term loans meant that revenue yield reduced slightly to 171.5% (2017: 178.4%).  However, the increased quality of our loan book was reflected in the further reduction in impairment which fell to 32.6% of revenue (2017: 37.6%), which was below our previously guided range of 33-37%. Operating profit margins of 10.3% benefited from the lower impairment and a marked reduction in temporary additional commission paid to those agents recruited in 2017.  Return on asset was 17.7%, close to our 20% target.

 

Year ended 31 December

 

Key Performance Indicators16

2018

Normalised

 

2017

Normalised

 

 

Period end self-employed agencies



897

1,005

Period end number of offices



66

69

Period end customer numbers (000)



93.8

104.1

Period end loan book (£m)



41.0

40.2

Average loan book (£m)



38.0

27.4

Revenue yield (%)



171.5

178.4

Risk adjusted margin (%)



115.6

111.4

Impairments/revenue (%)



32.6

37.6

Impairment/average loan book (%)



55.9

67.0

Operating profit margin (%)



10.3

(2.7)

Return on asset (%)



17.7

(4.8)

16 For definitions see glossary of alternative performance measures in the Appendix.

Plans for 2019

After two years of exceptional expansion, 2019 will be focused on rebalancing the loan book with a return to shorter term loans and on increasing the percentage of quality customers, both of which are expected to result in a more normalised rate of loan book growth of 2-5% per annum.  

The benefits of some of the technological improvements mentioned above, coupled with a more modest rate of loan book growth going forward, means we have been able to re-size the management and organisation structure to better suit the scale and growth profile of the business going forward.  The new structure, which was announced internally in January 2019 has kept the agent to business manager ratio at 6:1 and is expected to increase operational efficiency and better align the fixed cost base with future revenue growth. 

Each of these initiatives should help us to continue to grow profitability in 2019, albeit at a slower pace than in 2018, and we remain on course to meet our target of a 20% return on assets (see glossary on alternative performance measures in the Appendix) in the medium-term.

 

On 22 February 2019 we announced a firm offer to acquire Provident Financial plc. including an intention to complete a demerger of Loans at Home, to assist with the CMA competition approval process and for Loans at Home to be admitted to trading either on the Main Market (with a standard listing) or on AIM. Although the timing and structure of the Demerger remain subject to further consideration, including by the CMA, it is expected that the Demerger would take place following completion of the offer to acquire Provident. If successful, this would mean that Provident Shareholders who participate in the Transaction, as well as existing NSF Shareholders, would then receive shares in the newly-listed Loans at Home. As the Demerger remains subject to review by the CMA, NSF has reserved the right to change its strategic plans with respect to Loans at Home as described in the Offer announcement, including (without limitation) the timing of the Demerger. Further details can be found in the Offer announcement issued on 22 February 2019 which is available on the Group's website, www.nsfgroupplc.com.

 

Central costs

The increase in normalised administrative expenses to £5.4m (2017: £4.8m), reflected, inter alia, increased costs associated with a new 2018 Save as You Earn Scheme plus the full year cost of the 2017 scheme.  The amortisation of acquired intangible assets increased to £8.7m (2017: £7.9m) reflecting a reduced charge for Everyday Loans and a full year charge for George Banco for the first time. The prior year exceptional item of £0.4m comprised acquisition costs together with the write-off of the remaining balance of capitalised fees referred to above.

 

Year ended 31 December


2018

Normalised16

2018

Amortisation of acquired intangibles and exceptional items

2018

Reported



£'000

£'000

£'000

Revenue


-

-

-

Admin expenses


(5,397)

(8,681)

(14,078)

Operating loss


(5,397)

(8,681)

(14,078)

Exceptional items


-

-

-

Loss before interest and tax


(5,397)

(8,681)

(14,078)

Finance cost


(35)

-

(35)

Loss before tax


(5,432)

(8,681)

(14,113)

Taxation


834

1,649

2,483

Loss after tax


(4,598)

(7,032)

(11,630)






 

Year ended 31 December


2017

Normalised17

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)






17 See glossary of alternative performance measures and key performance indicators in the Appendix.

 

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 IAS 39: 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 increase in credit risk.  As a result, whilst the underlying cash flows from the asset are unchanged, IFRS 9 has the effect of bringing forward provisions into earlier accounting periods. This resulted in a one-off adjustment to receivables, deferred tax and reserves on adoption.

To assist analysts and investors, the 2017 full year results included a separate disclosure detailing an estimate of the expected impact of IFRS 9 on the closing balance sheet for 2017 (and therefore the opening balance sheet for 2018).  The actual audited figures for 2017 are slightly different from the previously published estimates and a reconciliation between the two is shown in the next table.

 

IFRS 9 balance sheet

IAS 39*

 

 

£m

IFRS 9
estimated 2017 adjustment

£m

IFRS 9

audited 2017 

adjustment

£m

IFRS 9

2018 opening balance sheet

£m

Normalised net loan book:18





- Branch-based lending

153.8

(1.7)

(4.4)

149.4

- Guarantor loans

51.1

(0.9)

0.5

51.6

- Home credit

51.2

(10.6)

(11.1)

40.2

Total net loan book

256.1

(13.2)

(15.0)

241.2

Other

(14.7)

2.5

2.3

(12.4)

 

Net assets

241.4

(10.7)

 

(12.7)

228.8

18 See glossary of alternative performance measures and key performance indicators in the Appendix.

* The 2017 comparatives have been adjusted so that unamortised broker commissions of £8.26m are included within net loan book.

The adoption of IFRS 9 resulted in a reduction in receivables of £15.0m at 31 December 2017, which net of deferred tax, resulted in a reduction in net assets of £12.7m. Whilst the particularly strong loan book growth in home credit meant that it experienced the largest adjustment to the net loan book, 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 has been no change to the Group's underwriting process and our scorecards are unaffected by the change in accounting. The total cash flows from a loan are the same under both IAS 39 and IFRS 9 and the cash generation over the life of a loan remains 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

The principal risks facing the Group 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 - risk that the Group's strategy fails to deliver the outcomes expected;

 

§  Business risks:

 

operational - the Group's activities are large and complex and so there are many areas of operational risk that include technology failure, fraud, staff management and recruitment risks, underperformance of key staff, taxation, health and safety as well as disaster recovery and business continuity risks;

 

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

 

cyber - 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 - whilst the Group is well-capitalised with £285m of committed debt facilities until August 2023 and a revolving credit facility for a further £45m, 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.

 

These risks may change if the Offer were to be successful.

 

On behalf of the Board of Directors

 

Nick Teunon

Chief Financial Officer

 

8 March 2019

Consolidated statement of comprehensive income

For the year ended 31 December 2018

 


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

 2018

 

 

 

 

£'000

Revenue

4


166,502

(7,678)

158,824

Other operating income



1,626

-

1,626

Modification loss



(482)

-

(482)

Impairment



(42,688)

-

(42,688)

Administrative expenses



(89,082)

(8,681)

(97,763)

Operating profit

6


35,876

(16,359)

19,517

Exceptional items



-

-

-

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



35,876

(16,359)

19,517

Finance cost



(21,107)

-

(21,107)

Profit/(loss) on ordinary activities before tax



14,769

(16,359)

(1,590)

Tax on profit/(loss) on ordinary activities

7


(3,197)

3,108

(89)

Profit/(loss) for the year



11,572

(13,251)

(1,679)

Total comprehensive loss for the year





(1,679)

 

Loss attributable to:






- Owners of the parent





(1,679)

- Non-controlling interests





-

 

Loss per share


Note


Year ended

31 Dec 2018

 
Pence

Basic and diluted

8


(0.54)

 

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

 

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

4


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

6


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

7


(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

8


(3.26)

 

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

Consolidated statement of financial position

As at 31 December 2018

 


Note

31 Dec 2018

£'000

31 Dec 2017*

£'000

ASSETS




Non-current assets




Goodwill

10

140,668

140,668

Intangible assets

11

13,431

21,077

Other assets


241

-

Property, plant and equipment


7,723

5,562



162,063

167,307

Current assets




Amounts receivable from customers

12

314,614

268,096

Trade and other receivables


3,967

1,551

Cash and cash equivalents


13,894

10,954



332,475

280,601

Total assets


494,538

447,908

LIABILITIES AND EQUITY




Current liabilities




Trade and other payables


17,242

10,353

Total current liabilities


17,242

10,353

Non-current liabilities




Deferred tax liability

13

252

4,996

Bank loans


266,322

199,316

Total non-current liabilities


266,574

204,312

Equity




Share capital

15

15,852

15,852

Share premium

15

254,995

254,995

Other reserves


(2,011)

(1,066)

Retained loss


(58,368)

(36,793)



210,468

232,988

Non-controlling interests


255

255

Total equity


210,723

233,243

Total equity and liabilities


494,538

447,908

 

* Note: 2017 balance sheet amounts receivable from customers and prepayments have been adjusted for the classification of unamortised broker commissions. Refer to note 12 for detail. 2017 balance sheet intangibles has been adjusted for software development assets previously classified as property, plant and equipment.

 

Consolidated statement of changes in equity

For the year ended 31 December 2018

 


Note

Share

capital

£'000

Share

premium

£'000

Other

reserves

£'000

Retained

loss

£'000

Non-controlling interest

£'000

Total

£'000

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

9

-

-

-

(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

Total comprehensive loss for the year


-

-

-

(1,679)

-

(1,679)

IFRS9 transition opening balance adjustment

3




(12,718)


(12,718)

Transactions with owners, recorded directly in equity:

 

Dividends paid

9

-

-

-

(7,177)

-

(7,177)

Credit to equity for equity-settled share based payments


-

-

1,157

-

-

1,157

Purchase of own shares


-

-

(2,102)

-

-

(2,102)

 At 31 December 2018


15,852

254,995

(2,011)

(58,368)

255

210,723

Consolidated statement of cash flows

For the year ended 31 December 2018


Note

Year ended

31 Dec 2018
£'000

Year ended

31 Dec 2017
£'000

Net cash used in operating activities

16

(35,116)

(37,000)

Cash flows from investing activities




Purchase of property, plant and equipment


(6,095)

(5,536)

Proceeds from sale of property, plant and equipment


180

605

Acquisition of subsidiary

14

-

(16,442)

Net cash used in investing activities


(5,915)

(21,373)

 

Cash flows from financing activities




Finance cost


(14,121)

(7,974)

New bank loan raised


67,371

77,882

Dividends paid


(7,177)

(4,439)

Purchase of own shares


(2,102)

(1,357)

Net cash from financing activities


43,971

64,112





Net increase in cash and cash equivalents


2,940

5,739

Cash and cash equivalents at beginning of year


10,954

5,215

Cash and cash equivalents at end of year


13,894

10,954

 

As at 31 December 2018 the Group had cash of £13.9m (2017: £11.0m) with gross debt of £272.8m (2017: £208.1m).

 

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 2018 or 2017. The financial information for the year ended 31 December 2017 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 consolidated financial information set out in the announcement have been prepared in accordance with IFRS as adopted by the European Union and, as regards the Company financial statements, applied in accordance with the provisions of the Companies Act 2006.

 

The audit of the statutory accounts for the year ended 31 December 2018 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. Changes in accounting policies

On 1 January 2018, the Group implemented IFRS 9 'Financial Instruments' and IFRS 15 'Revenue from Contracts with Customers'. As permitted by IFRS 9 and IFRS 15, comparative information for previous periods has not been restated. The impact on the Group's financial position of applying IFRS 9 requirements is set out below. The impact of adopting IFRS 15 is not material.

For the impact of adopting IFRS9 from 1 January 2018 in relation to amounts receivable from customers, refer to note 3.

 

3. Impact on the financial statements

IFRS 9 has been adopted without restating comparative information. The reclassifications and the adjustments arising from the new impairment rules are therefore not reflected in the balance sheet as at 31 December 2017, but are recognised in the opening balance sheet on 1 January 2018. As prior periods have not been restated, changes in impairment of financial assets in the comparative periods remain in accordance with IAS 39 and are therefore not necessarily comparable to the loss provisions reported for the current period.

Implementation of IFRS 9 resulted in a £12.7 million reduction in the Group's opening equity at 1 January 2018 net of £2.3 million related to deferred tax impacts. There has been no change in the carrying amount of financial instruments on the basis of their measurement categories. All adjustments have arisen solely due to a replacement of the IAS 39 incurred loss impairment approach with an expected credit loss ('ECL') approach.

The following table shows the adjustments recognised for each individual line item affected by the application of
IFRS 9 at 1 January 2018.  The application of IFRS 9 had no impact on the consolidated cash flows of the Group.


Condensed consolidated statement of financial position

 


Note

31 December 2017

as originally presented*

IFRS 9 adjustment - classification and measurement

IFRS 9 adjustment - expected credit losses

1 January 2018

restated

 

 



£'000

£'000

£'000

£'000

Current assets






Amounts receivable from customers


268,096

-

(14,980)

253,116

Non-current liabilities






Deferred tax liability


(4,996)

-

2,262

(2,734)

Equity






Retained loss


 (36,793)

-

(12,718)

 (49,511)

* The 2017 comparatives have been adjusted so that unamortised broker commissions of £8.26m are included within amounts receivable from customers.

 

3.1 IFRS 9 Financial Instruments - Impact of adoption

IFRS 9 replaces the provisions of IAS 39 that relate to the recognition, classification and measurement of financial assets and financial liabilities, de-recognition of financial instruments, impairment of financial assets and hedge accounting.

The adoption of IFRS 9 from 1 January 2018 resulted in changes in accounting policies and adjustments to the amounts recognised in the financial statements. In accordance with the transitional provisions in IFRS 9(7.2.15), comparative figures have not been restated. The Group does not use hedge accounting.

The total impact on the Group's retained loss as at 1 January 2018 and 1 January 2017 is as follows:


1 January 2018

£'000

1 January 2017

£'000




Closing retained loss 31 December - IAS 39

 (36,793)

 (22,019)

Increase in provision for amounts receivable from customers (3.1.1), (3.1.2)

(14,039)

-

Change in modification criteria (3.1.1), (3.1.2)

(941)

-

Increase in deferred tax assets relating to impairment provisions (3.1.1), (3.1.2)

2,262

 -

Total adjustment to retained loss from adoption of IFRS 9 on 1 January 2018

(12,718)

-

Opening retained loss 1 January - IFRS 9

(49,511)

(22,019)

 
3.1.1 Classification and measurement

On 1 January 2018 (the date of initial application of IFRS 9), the Group's management has assessed the financial instruments held by the Group and determined whether reclassification was needed under IFRS 9. Financial assets and financial liabilities of the Group comprise cash, loans and receivables, and bank borrowings. These are measured at amortised cost and there is no change in classification from IAS 39 under IFRS 9.

3.1.2 Impairment of financial assets

The Group's amounts receivable from customers was subject to IFRS 9's new expected credit loss model.

The Group was required to revise its impairment methodology under IFRS 9 for these assets.

When a financial asset is modified the Group assesses whether this modification results in derecognition. In accordance with the Group's policy, a modification results in derecognition when it gives rise to substantially different terms.

The impact of the change in modification criteria and impairment methodology on the Group's retained earnings and equity is disclosed in the table in note 3.1

While cash and cash equivalents and intercompany loans are also subject to the impairment requirements of IFRS 9, the Group has concluded that the expected credit loss on these items is nil and therefore no impairment loss adjustment is required.

3.1.3 Amounts receivable from customers

The amounts receivable from customers as at 31 December 2017 reconcile to the opening receivables balance on 1 January 2018 as follows:


Branch-based lending

Guarantor loans

Home credit

Total

Amounts receivable from customers

£'000

£'000

£'000

£'000

At 31 December 2017* - calculated under IAS 39

157,762

59,135

51,235

268,096

Amounts restated through opening retained earnings

(4,408)

494

(11,067)

(14,980)

Opening net receivables at 1 January 2018 - calculated under IFRS 9

153,318 

59,629

40,168 

253,116 

The additional loss allowance recognised upon the initial application of IFRS 9 as disclosed above resulted entirely from a change in the measurement attribute of the loss allowance relating to amounts receivable from customers.


Reconciliation of estimate of IFRS 9 impairment provision as at 31 December 2017 to actuals as at 1 January 2018


Branch-based lending

Guarantor loans

Home credit

Total


£'000

£'000

£'000

£'000

At 31 December 2017* - estimated impact on net receivables from transition to IFRS 9

(1,744)

(916)

(10,601)

(13,261)

At 1 January 2018 - actual impact on net receivables from transition to IFRS 9

(4,408)

494

(11,067)

(14,980)

Difference between estimated and actual

2,663

(1,410)

466

1,719

 

4. Revenue

Revenue is recognised by applying the 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 2018

£'000

Year ended

31 Dec 2017
 £'000

Interest income

166,502

119,756

Fair value unwind on acquired loan portfolio

(7,678)

(11,985)

Total revenue

158,824

107,771

 

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

 


Year ended

31 Dec 2018

£'000

Year ended

31 Dec 2017
 £'000

Depreciation of property, plant and equipment

1,772

1,497

Amortisation of intangible assets

9,661

7,897

Staff costs

45,061

32,899

Rentals under operating leases

2,917

1,926

Profit on sale of property, plant and equipment

(45)

(416)

 

6. 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

Guarantor loans1

£'000

Home

credit

£'000

Central

£'000


2018 Total

£'000

Year ended 31 December 2018







Interest income

79,579

21,748

65,175

-


166,502

Fair value unwind on acquired loan portfolio

(3,958)

(3,720)

-

-


(7,678)

Total revenue

75,621

18,028

65,175

-


158,824

Operating profit/(loss) before amortisation

22,949

3,932

6,714

(5,397)


28,198

Amortisation of intangible assets

-

-

-

(8,681)


(8,681)

Operating profit/(loss) before exceptional items

22,949

3,932

6,714

(14,078)


19,517

Exceptional items2

-

-

-

-


-

Finance cost

(12,778)

(5,833)

(2,461)

(35)


(21,107)

Profit/(loss) before taxation

10,171

(1,901)

4,253

(14,113)


(1,590)

Taxation

(1,860)

62

(774)

2,483


(89)

Profit/(loss) for the year

8,311

(1,839)

3,479

(11,630)


(1,679)

 

 








Branch-based lending

£'000

Guarantor loans1

£'000

Home

credit

£'000

Central

£'000

Consolidation adjustments3

£'000

2018 Total

£'000

Total assets

208,690

86,937

52,609

573,126

(426,823)

494,538

Total liabilities

(252,642)

-

(65,527)

(268,580)

(283,816)

Net assets

(43,952)

86,937

(12,918)

304,545

(123,889)

210,723

 

Capital expenditure

 

3,748

 

-

 

2,256

 

91

 

-

 

6,095

Depreciation of plant, property and equipment

1,188

117

398

69

-

1,772

Amortisation of intangible assets

-

-

980

8,681

-

9,661

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 There were no exceptional items for 2018 (2017: £4.5m related to the refinancing of the Group's debt facilities, £1.0m related to merger and acquisition activities and £0.9m related to restructuring).

3 Consolidation adjustments include the acquisition intangibles of £8.5m (2017: £17.2m), goodwill of £140.7m (2017: £140.7m), fair value of loan book of £4.3m (2017: £12.0m) and the elimination of intra-Group balances.

 


Branch-based lending

£'000

Guarantor loans1

£'000

Home

credit

£'000

Central

£'000


2017 Total

£'000

Year ended 31 December 2017







Interest income

60,937

8,078

50,741

-


119,756

Fair value unwind on acquired loan portfolio

(11,874)

(111)

-

-


(11,985)

Total revenue

49,063

7,967

50,741

-


107,771

Operating profit/(loss) before amortisation

10,780

2,637

3,102

(4,820)


11,699

Amortisation of intangible assets

-

-

-

(7,897)


(7,897)

Operating (loss)/profit before exceptional items

10,780

2,637

3,102

(12,717)


3,802

Exceptional items2

(5,290)

(230)

(467)

(355)


(6,342)

Finance cost

(7,051)

(2,029)

(1,299)

(102)


(10,481)

(Loss)/profit before taxation

(1,561)

378

1,336

(13,174)


(13,021)

Taxation

128

(65)

179

2,444


2,686

(Loss)/profit for the year

(1,433)

313

1,515

(10,730)


(10,335)









Branch-based lending

£'000

Home

credit

£'000

Guarantor loans

£'000

Central

£'000

Consolidation adjustments

£'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

 

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

 

7. Taxation

 


Year ended

31 Dec 2018

£'000

Year ended

31 Dec 2017
£'000

Current tax charge



In respect of the current year

2,484

673

Total current tax charge

2,484

673

Deferred tax credit

(2,395)

(3,359)

Total tax charge/(credit)

89

(2,686)

 

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:


Year ended

31 Dec 2018 £'000

Year ended
 31 Dec 2017
£'000

Loss before taxation

(1,590)

(13,021)




Tax on loss on ordinary activities at standard rate of UK corporation tax of 19.00% (2017:19.25%):

(302)

(2,507)

Effects of:



Fixed asset differences

97

(38)

Expenses not allowable for taxation

379

199

RDEC

(7)

-

Share based payments

58

11

Chargeable gains/losses

(42)

33

Prior year adjustments

(32)

-

Adjustment to tax charge in respect of previous periods

-

(573)

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

-

176

Corporation tax rate change

(69)

-

Deferred tax rate change

-

60

Changes in unrecognised deferred tax

7

(142)

Deferred tax not previously recognised

-

95

Total tax charge/(credit)

89

(2,686)

 

Exceptional items and costs related to deferred consideration payments in George Banco and long-term incentive plans are included within 'expenses not allowable for taxation' due the nature of the transactions. There were no exceptional items in 2018, exceptional items disallowed in 2017 include costs in relation to the acquisition of George Banco totalling £0.6m. Other disallowed items include set up costs and the fair value of the long-term incentive schemes at the date of grant totalling £0.9m (2017: £0.4m).

Reductions in the UK corporation tax 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 2018 has been calculated based on the rate of 19% substantively enacted at the balance sheet date.

 

8. Loss per share


Year ended

31 Dec 2018

Year ended

31 Dec 2017

Retained loss attributable to Ordinary Shareholders (£'000)

(1,679)

(10,335)

Weighted average number of Ordinary Shares at year ended 31 December

312,713,410

316,901,254

Basic and diluted loss per share (pence)

(0.54p)

(3.26p)

 

 

 

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 in issue. 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. At 31 December 2018, 5,000,000 shares were held in treasury (2017: 1,900,000).

 


Year ended

31 Dec 2018

'000

Year ended

 31 Dec 2017
'000

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

10,967

8,723

 

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 2018 was the end of the contingency period.

9. Dividends

 

A half-year dividend of 0.6p per share (2017: 0.5 pence per share) was paid in October 2018. The Directors have recommended a final dividend in respect of the year ended 31 December 2018 of 2.0 pence per share (31 December 2017: 1.7 pence per share) which will amount to an estimated final dividend payment of £6.3m. This final dividend is not reflected in the balance sheet as at 31 December 2018 as it is subject to shareholder approval.

10. Goodwill

 


£'000

Cost and net book amount


At 31 December 2016

132,070

Acquisition of subsidiary (George Banco)

8,598

At 31 December 2017 and as 31 December 2018

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 2018 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 to note 14).

Under IFRS 13, 'Fair value measurement', the fair value used in the Goodwill impairment assessment is classified as Level 3 as the fair value is determined using discounted future cash flows.

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 forecasts;

       estimates made on the disposal costs of the business; and

       the discount rate applied to determine the future earnings.

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 one-year period to 31 December 2019 (versus a three-year period used in 2017), 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.

Loans at Home goodwill assessment for impairment:

The Group has calculated the fair value less costs to sell to be in the range of £64m to £67m, a headroom of between £2m and £5m from the carrying value. Considering the key judgements and estimates referred to above as well as the 2019 forecast earnings, the Group has identified that a reduction in 2019 forecast earnings of between 3% and 8% would necessitate an impairment charge. This is significantly tighter than identified in 2017. The financial budgets used in the 2017 earnings projections covered a three-year period and it was calculated that a 61% reduction in 2020 forecast earnings would necessitate an impairment charge to the carrying value of goodwill. Loans at Home's 2019 forecast is based on lending and collections assumptions and management are aware that if the business does not perform in line with these forecast assumptions then revenues and loan loss provisions will be affected which would result in management needing to assess the goodwill at Loans at Home for impairment at this point. For example, if the business was to fall 10% behind forecast earnings for 2019, management would need to consider an impairment charge of between £1m and £5m depending on the fair value less cost to sell valuation used in the range identified above. Further uncertainties have arisen in 2018 as a result of the introduction of IFRS 9 and the potential impact of Brexit, which have affected the current price earnings multiples used in the calculations.

For Everyday Loans and Guarantor loans, considering the key estimates above, the Group has identified that it would require a movement in all of the judgements and estimates and 2019 forecast earnings of greater than 15% for Everyday Loans and 50% for Guarantor loans, to give rise to a potential impairment charge to the carrying value of goodwill recognised for these two CGUs.

 

11. Intangible assets

 


Customer lists

Agent network

Brands

Broker relationships

Technology

LAH IT software development

Total


£'000

£'000

£'000

£'000

£'000

£'000

£'000

Cost








At 1 January 2018

21,924

540

2,005

9,151

6,227

4,265

44,112

Additions

-

-

-

-

-

2,014

2,014

At 31 December 2018

21,924

540

2,005

9,151

6,227

6,279

46,126

Amortisation








At 1 January 2018

15,773

419

831

3,024

2,595

392

23,034

Charge for the year

3,786

121

404

2,813

1,557

980

9,661

At 31 December 2018

19,559

540

1,235

5,837

4,152

1,372

32,695

Net book value








At 31 December 2018

2,365

-

769

3,314

2,075

4,907

13,431

At 31 December 2017

6,151

121

1,174

6,127

3,632

3,871

21,077

 

IAS 38.122 requires the Group to disclose the carrying value and remaining amortisation period of individual intangible assets, the table below includes all material assets held by the Group as at 31 December 2018:

 


Carrying value as at 31 December 2018

Amortisation period remaining

Intangible assets

£'000

Years and months




Everyday Loans' acquired customer list

835

1 year 11 months

Credit-Decisioning technology at Everyday Loans

2,075

1 year and 4 months

Everyday Loans and TrustTwo brands

699

2 years and 4 months

George Banco's acquired customer list

1,530

2 years

George Banco brand

70

8 months

George Banco's broker relationship

3,314

1 year and 8 months

George Banco's acquired loan portfolio

4,310

2 years

Loans at Home IT software development

2,075

3 years

Intangible assets include acquired intangibles in respect of the customer list and agent relationships at Loans at Home 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. In addition, intangible assets include IT software development at Loans at Home.

The fair value of the customer lists of Loans at Home, Everyday Loans and George Banco on acquisition has been estimated by calculating the Net Present Value ('NPV') of the discounted cash flows from each new loan to be 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 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 has 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 fair value of George Banco's broker relationships on acquisition has been 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 has been estimated by assessing the likely commercial level of royalties that would be payable to a third party were the technology licensed 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 Everyday Loans, TrustTwo and George Banco brands on acquisition has been 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. The Board of Directors will assess each of the Group's remaining brands for impairment using the same methodology at each future accounting date.

Amortisation is charged to the statement of comprehensive income as follows:

 

Customer lists

Between 3 and 7 years

Agent network

3 years

Broker relationships

2 to 3 years

Credit decisioning technology

4 years

Brand

Between 1 and 5 years

Software development

3 to 5 years

Project costs associated with the development of computer software and website are capitalised where the software is a unique and identifiable asset controlled by the Group and will generate future economic benefits. These assets are amortised on a 20% straight-line basis over its estimated useful life once the development phase has been completed.

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.

 

12. Amounts receivable from customers

 


2018

£'000

2017*

£'000

Gross carrying amount

354,794

292,576

Loan loss provision

(40,180)

(24,480)

Amounts receivable from customers

314,614

268,096

 

*Unamortised broker commissions (as directly attributable transaction costs related to the acquisition of amounts receivable from customers) were previously recorded separately within prepayments. The 2017 comparatives have been adjusted so that unamortised broker commissions of £8.26m are included within 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.

The movement on the loan loss provision for the period relates to the provisions of Branch-based lending, Guarantor loans and Home Credit for the year. The amounts receivable from customers were recognised at fair value (net loan book value) at the date of acquisition.

Included within the gross carrying amount above are unamortised broker commissions, see table below:


2018

£'000

2017*

£'000

Unamortised broker commissions

10,711

8,260




Total unamortised broker commissions

10,711

8,260

Analysis of amounts receivable from customers due within/more than one year:


2018

£'000

2017*

£'000

Due within one year

133,917

128,869

Due in more than one year

180,698

139,227

Amounts receivable from customers

314,614

268,096

 

Analysis of amounts receivable from customers by operating segment:

 


Branch-based lending

£'000

Guarantor
loans

£'000

Home

credit

£'000

2018 Total

£'000

Gross carrying amount

196,744

90,204

67,846

354,794

Loan loss provision

(10,521)

(2,839)

(26,820)

(40,180)

Amounts receivable from customers

186,223

87,365

41,026

314,614

13. Deferred tax liability


£'000

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)

Charge relating to share based payments

13

Adjust for changes in deferred tax rate

31

Recognition of deferred tax asset at acquisition

530

Current year credit

3,328

At 31 December 2017

(4,996)

Adjust for changes in deferred tax rate

70

Charge relating to share based payments

3

IFRS 9 transitional adjustment

2,182

Current year credit

2,489

At 31 December 2018

(252)

The deferred tax liability was recognised on the intangible assets upon acquisition of Loans at Home, Everyday Loans and George Banco 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:


2018

£'000

2017

£'000

Accelerated tax depreciation

(140)

(65)

Recognition of intangible assets

(1,619)

(3,269)

Recognition of fair value adjustments on amounts receivable at acquisition

(819)

(2,277)

Restatement of loan loss spreading

(35)

-

Other short term timing differences

95

219

Recognition of deferred tax relating to share based payments

26

22

Other losses and deductions

62

374

FRS 102 adoption

(4)

-

IFRS 9 transitional adjustment

2,182

-

Net deferred tax liability

(252)

(4,996)

 

14.  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.

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.).

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.

Assuming George Banco was acquired on 1 January 2017, reported revenue was £10.8m and profit before tax was £0.9m after fair value adjustments.

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. Share capital and share premium

 

Between 9 November 2017 and 1 May 2018 the Company purchased a total of 5,000,000 Ordinary Shares for a total consideration of £3,426,349.30 (before dealing costs).  These shares are held in treasury.

 

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 2017 and at December 2018

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.


Total

£'000

Balance at 31 December 2017 and at December 2018

254,995

 

16. Net cash used in operating activities



Year ended

31 December
2018

£'000


Year ended

31 December
2017

£'000

Operating profit/(loss)

19,517

(2,540)

Taxation paid

(1,164)

(2,226)

Depreciation

1,772

1,497

Share based payment charge

1,157

291

Amortisation of intangible assets

9,661

7,897

Fair value unwind on acquired loan book

7,678

11,985

Profit on disposal of property, plant and equipment

(35)

(416)

Increase in amounts receivable from customers

(75,173)

(54,437)

Increase in other assets

241

-

Decrease/(increase) in receivables

5,844

(51)

(Decrease)/increase in payables

(4,132)

1,000

Cash used in operating activities

(35,116)

(37,000)

 

APPENDIX

Glossary of alternative performance measures and key performance indicators

The Group has developed a series of alternative performance measures that it uses to monitor the financial and operating performance of each of its business divisions and the Group as a whole.  These measures seek to adjust reported metrics for the impact of non-cash and other accounting charges (including modification loss) that make it more difficult to see the true underlying performance of the business.  Note that all 2017 key performance indicators have been adjusted to reflect the position as if IFRS 9 (see note 3 above) had been adopted as at 1 January 2017.

 

Alternative performance measure

Definition

Normalised revenue

Normalised operating profit

Normalised profit before tax

Normalised earnings per share

 

Normalised figures are before fair value adjustments, amortisation of acquired intangibles and exceptional items

Key performance indicators

Definition

Impairments/revenue

Impairments as a percentage of normalised revenues

Net loan book

 

Net loan book before fair value adjustments but after deducting any impairment due

Net loan book growth

Annual growth in the net loan book

Operating profit margin

Normalised operating profit as a percentage of normalised revenues

Return on asset

Normalised operating profit as a percentage of average loan book excluding fair value adjustments

Revenue yield

Normalised revenue as a percentage of average loan book excluding fair value adjustments

Risk adjusted margin

Normalised revenue less impairments as a percentage of average loan book excluding fair value adjustments

 


This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
 
END
 
 
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Preliminary announcement of 2018 full year results - RNS