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Analyst
Presentation Interim results
6th October 2016
Private & Confidential
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Management team
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Andy Thomson – Chief Financial Officer
• Joined the Company in 2009
• Chartered Management Accountant
• Led Finance teams since 1996
• Public company experience includes
roles at Morgan Sindall, Tesco and
Cadbury Schweppes
• Broad business knowledge and extensive
experience in Commercial, Legal, Internal
Audit, Insolvency, IT and Human
Resources
• Pivotal role in the acquisition and
integration of Morses Club and SFS
Paul Smith – Chief Executive Officer
• Joined the Company in October 2014
and has been responsible for growing
Morses Club by acquisition and
organically
• Experience in mobile payment
technology as Managing Director of EZ
Pay Ltd, a prepaid MasterCard
organisation, from 2009 to 2012 prior to its
sale to BC Partners
• Started his career in the global software
market before joining Phones 4U Group in
1998, where he became an MD and was
an integral part of the management
team until its sale for £1.4bn in 2006
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Introduction to
Morses Club
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Trading in line with the Boards expectations – strong first half performance with revenue up 8% to
£47.2m and net loan book growth of 5%
No.2 market share – c. 207,000 customers across UK
Experienced executive team – c100 years of Home Credit experience
Improved fundamentals – tighter credit and focus on higher quality lending
Highly invested IT platform
Progressive dividend policy, with payment of maiden plc dividend announced
Overview – Morses Club R26
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130 year history – established, cash generative, UK consumer finance business, growing quickly and capturing
market share
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Market overview
• UK HCC market is well-established comprising c. 3m
people(1)
• c. 6 million HCC transactions in the UK per year(2)
• 1.5m – 2m borrow regularly
• Market value of c. £1bn
• Highly fragmented beneath the top three players
• No. 1 player is reducing its focus on HCC
• Tail of smaller players
Morses Club’s market share to grow via:
• Acquisitions
• Territory builds
• Enhancement of HCC delivery methods
Expansion of product range
(1) Source: Provident Financial Group plc Annual Report, 2014
(2) Source: Personal Finance Research Centre, University of Bristol
(3) Source: NSF Investor Presentation (July 2015)
Significant opportunity for market share gains in a large, fragmented market
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Provident c. 875k customers
Morses Club c. 207k customers
Loansathome4u c. 98k customers
Others c. 600k customers
HCC market
Rest of UK non-standard credit market
12
m p
eo
ple
3m
people
Market position(3)
1
2
3
No. 2 player in the Home Collected Credit
market
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Financial
Review
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Financial highlights R26
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(1) Adjustments to Aug-15 and Aug-16 PBT are set out in the footnotes on page 8
(2) Return on equity calculated as rolling 12 months adjusted PAT divided by closing tangible net assets. Adjustments to PAT are
also set out in the footnotes on page 8. Aug -16 tangible equity includes £2.7m of capitalised IT costs (Aug 15: £0.5m )
(3) Based on Aug-15 pro-forma balance sheet as set out on page 11
Source: Company information, Company accounts
Credit issued
£56.4m £66.0m
Aug-15 Aug-16
Impairment as a % of revenue Return on equity(2)
Adj. PBT(1)
18.3%
22.5%
Aug-15 Aug-16(3)
£8.8m £8.6m
Aug-15 Aug-16
27.4% 25.4%
Aug-15 Aug-16
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• Revenue has increased by 8% against the comparable
period last year reflecting a 5% increase in the closing loan
book and increased cash and revenue yields
• Impairment in the 26 weeks to August 2015 was artificially
low, reflecting a focus on integrating the Shopacheck and
Morses Club businesses rather than customer growth
• Agent commission has increased from 21.1% of revenue to
23.1% of income, partly due to territory build subsidies
increasing from £0.3m to £0.7m. The remainder of the
increase was a result of enhancing the Morses Club
schemes and was anticipated in our budgets
• Administration costs (including depreciation) increased from
£16.5m to £16.6m though as a percentage of revenue they
have fallen from 37.8% to 35.2%, a productivity improvement
of 7%
• Total cost to income ratio reduced from 58.9% to 58.3%
despite increasing agent commissions
• We are pleased to announce a maiden interim dividend of
2.1p payable on 18th November 2016 (1) Aug-15 adj. operating profit excludes exceptional costs of £0.9m and amortisation of acquired intangibles
of £2.6m
(2) Aug-16 adj operating profit excludes IPO & re-structuring costs of £2.4m and amortisation of acquired
intangibles of £1.6m
(3) £1.1m of finance charges incurred at parent company level in relation to debt financing to fund the group’s
operations in H1 2015
(4) Normalised tax rate of 21% applied to adjusted PBT to reach adjusted PAT
(5) Total costs includes agent commission, administration expenses (pre exceptional) and depreciation.
Source: Company information, Company accounts
(£m) Aug-15 Aug-16
Customer numbers (‘000) 203 207
Period end receivables 53.6 56.2
Revenue 43.6 47.2
Impairment (8.0) (10.6)
Agent commission (9.2) (10.9)
Gross profit 26.4 25.7
Administration expenses (pre-exceptional) (16.1) (16.0)
Depreciation (0.4) (0.6)
Adj. operating profit(1)(2) 9.9 9.1
Adj. finance costs(3) (1.1) (0.5)
Adj. PBT 8.8 8.6
Taxation(4) (1.8) (1.8)
Adj. PAT 7.0 6.8
Cost (inc Dep’n)/ income (5) 58.9% 58.3%
Administrative cost inc. depreciation / income 37.8% 35.2%
Commentary Income statement
Income statement
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Attractive lending margins and improving cash
and yield income Scope for further improvement to Return on Assets Driven by shortening of loan book
Return on Assets(1)
• Return on Net Loan Book is 23.3% (Aug 15: 21.9%)
(1) Return on assets calculated as rolling 12 months adjusted PAT divided by closing tangible assets. Adjustments to
PAT are set out in the footnotes on page 8
(2) Based on gross receivables
Source: Company information
Average cash and income yield(2)
… average loan duration is falling …
Loan duration breakdown(2)
Aug-15 Aug-16
• Average customer balances are falling:
Aug 16 – £552
Aug 15 – £566
• Average loan duration is falling
Aug 16 – 42.00 weeks
Aug 15 – 45.41 weeks
• Weighted cash yields have increased by 5.1% since Feb 16
• Weighted revenue yields have increased by 2.8% since Feb 16
3.75 3.89 4.18 4.40
1.63 1.67 1.75 1.80
Feb-14 Feb 15 Feb-16 Aug-16Weighted Cash Yield (£/£100/wk) Weighted Revenue Yield (£/£100wk)
0.3%
37.3%
47.8%
8.4%
4.2% 1.9%
6.7%
42.6% 42.3%
4.6%
2.6%
1.1%
20 week loans
33 week loans
52 week loans
78 week loans
Acquisitions
Other
18.5% 19.5%
Aug 15 Aug-16
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Strong impairment track record
Growth achieved whilst maintaining impairment at the lower end of guidance
Impairment as a % of Revenue
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Policy
• Impairment policy is prudent and in line with best practice
• Receivables are impaired when the cumulative amount of
two or more contractual weekly payments have been
missed in the previous 13 weeks
• Impairment is calculated using models which use historical
payment performance to generate the estimated amount
and timing of future cash flows from each arrears stage
• A further provision is made for receivables that have not yet
missed two or more payments in the previous 13 but may
have the propensity to become impaired in the near future
(IBNR provision)
• Debts sold after 17 weeks non-paid
Achievement
• Impairment results to August 2015 were not sustainable as
they reflected a period of integration rather than growth
• Impairment target of 22% - 27% of revenue
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Source: Company information
Arrears analysis
Aug 15 Aug 16
Net receivables £53.6m £56.2m
Neither past due nor impaired 68.2% 70.6%
Past due not impaired 0.7% 0.4%
Impaired 31.1% 29.0%
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28
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Imp
airm
ent
/ R
even
ue
%
Ran
ge
Aug 16 revenue / impairment ratio 22.5%
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• Increase in property, plant and equipment reflects £2.1m
investment in tablet technology and supporting IT
infrastructure
• 5% growth in net receivables driven by increased quality
of customer base
• Loan facility last year reflects £15m cash dividend made to
the previous parent company. Christmas borrowing is
anticipated to exceed the £20m last year due to timing of
acquisitions, capital expenditure and dividend payment
• Shawbrook facility of £25m expiring in March 2019 is
unchanged, opportunities to increase facilities remain
(1) Pro forma balance sheet Aug 15 adjusted to reflect elimination of an intercompany balance of £33.6m owed to
the parent company and £15m Shawbrook facility reassigned to Morses Club in September 2015 from
parent company post half year end
(2) Property plant and equipment balance includes Aug 16 £2.7m (Aug 15: £0.5m) of capitalised IT costs
Consolidated
(£m) Aug-15 Feb-16 Aug-16
Non-current assets
Goodwill & Intangibles 9.5 7.6 7.2
Property, plant and equipment(2) 2.3 3.9 3.7
11.8 11.5 10.8
Current assets
Trade receivables 53.6 56.9 56.2
Cash and cash equivalents 6.0 3.8 5.7
Other current assets (1) 1.5 1.5 1.8
61.1 62.2 63.7
Total assets 72.9 73.7 74.5
Current liabilities
Trade and other payables (5.5) (9.4) (7.1)
Loan facility (1) (15.0) (9.0) (8.5)
(20.5) (18.3) (15.6)
Total liabilities (20.5) (18.3) (15.6)
Net assets 52.4 55.3 58.9
Net tangible assets 42.9 47.7 51.7
Commentary Balance sheet
Conservative balance sheet and funding model
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Strategy and
Growth
Initiatives
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Our achievements
Success of core business development
Initiatives Achievements
Cleansing of existing and purchased loan
books
H1 has resulted in a 6% increase in our highest performing tier of debt
Shortening loan duration H1 has resulted in average loan duration reducing from 44 to 42 weeks
Efficiency across core business 7% improvement in productivity
IT developments now fully released to yield further cost reductions in H2 and
beyond
Attracting and retaining the best agents 63% of agents have worked with Morses Club for more than 2 years (37% for
more than 5 years, 22% for more than 10 years)
The Company is an attractive employer and service provider for agents
Many agents are former customers
Organic growth through territory builds In H1 we have opened 114 Territory builds against 68 by August 2015
Payments to Terms of 92%
C.7,500 new customers acquired through territory builds in H1
Acquisitions Completed £3.2m of book purchase in H1, resulting in the acquisition of 79
Agents and c10,500 customers
Enhanced marketing Web & affiliate referrals have produced c. 20,000 customers in H1
Web traffic to the MCL web site has increased to an average monthly hit rate
of 110,000 representing a 30% uplift YOY
Mobile takes account of 82% traffic to our website - illustrating the wisdom in
our Mobility based platform development
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Progress Update
Growth strategy
Initiatives Developments
Investment in IT H1 has seen the roll out of Mobility 2. This will give rise to savings in print,
postage, storage, Agent / Manager productivity and enhances regulatory
controls
Introduction of new products In H2 we will be unveiling our new on-line loan brand. Product and system are
on track for a “soft” launch in H2 subject to FCA approval
Delivery of digital discounts/rewards direct to customers via mobile and web
with a potential reach of 70,000 retail and web offers due for launch in H2 via
the MCL platform. This is the first phase in development of the ‘Club’
concept
Delivery of digitised direct customer communications due for delivery in 2017
Engaging new types of customers The new on-line brand will appeal to the incremental 9 million customers in
the non-standard finance sector who do not use HCC
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(1) Company analysis of search terms
(2) Timings are approximate, subject to FCA variation approval process
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Opening up new markets to Morses Club
Introducing new products to accelerate growth
• Positive customer response to introduction of our pre-paid
Morses Club Card - attracted 5,000 customers within 6 months,
with £1.55m cashless loan balances – 100% of FY2017 annual
target achieved within 6 months
• 31.3% of our customer base is 35 or younger, a growth from
24.4% YOY
• C. 7,500 AIP’s (Loan Approvals in Principle) are generated
every month which is a 30% y-o-y increase in AIP’s from the
web
• Launch of MCL Facebook strategy has generated 3,000 ‘likes’
within 3 months helping to build the MLC on-line brand
• 96% of our customers (who use social media) use Facebook
• Further technology and mobility developments are planned in
line with customer feedback and in light of high penetration of
mobile usage on the Morses Club website
Morses Club Card –
Cashless Lending
Online Products –
Remote Collect
21st Century Products - E-Loans &
Mobile Wallet
Broadening the product range
Roadmapped Infrastructure
in place Internally trialled
Expected
Launch
Morses Club Card
Remote Collect
Online Lending
Q4 FY17 Q4 FY17
E-money Q1 FY18 Q2 FY18 Q3 FY18
Revolving Credit TBC TBC TBC TBC
Mobile Wallet TBC TBC TBC TBC
New initiatives timeline(2)
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• The product targets a more affluent and younger demographic
• Brand already developed and tested with target customers – very positive response
• Brand targets the same values of forbearance, flexibility and simplicity found in our HCC product
• Directed at 25 – 35 year old customer demographic, C1, C2, D, gender neutral, with household earnings of up to
£30,000
• Targets a totally different, incremental demographic to HCC, but builds on high knowledge of delivering customer
satisfaction in short-term loans
• Exploits cultural / social shift away from payday brands
• Leverages high quality, experienced supply chain and existing management experience
• Ideally suited to our strategy linking mobile commerce, digitisation (of products/services/loyalty) and social media
outreach
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(1) Company analysis of search terms
(2) Timings are approximate, subject to FCA variation approval process
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Our new online lending brand will emulate the Morses Club existing brand values of forbearance, flexibility and
simplicity
Online lending
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Strong satisfaction scores from our customers, employees and agents
Satisfaction – Customers, Employees and Agents
Customer Employees Self-employed Agents
• 97% overall customer
satisfaction
• 71% overall satisfaction – 16%
increase from 2015
• 70% of agents are satisfied
• 100% satisfied with ease of
application
• 79% employee engagement –
10% increase from 2015
• 70% happy to be affiliated with
MCL
• 98% satisfied with payment
term
• 80% understand the aims and
direction of MCL
• 68% feel part of MCL
• 97% satisfied with product
explanation
• 71% feel optimistic about the
future of the business
• 95% understand the
importance of TCF
• 97% satisfied with size of loan
available
• 70% proud to work for MCL • 94% see TCF as part of their
day to day mind set
• 95% satisfied with size of
weekly payment
• 91% believe that TCF part of
the daily mind-set of the
business
• 84% believe that affordability
check is comprehensive in
determining what a customer
can afford
• 84% believe MCL offers great
customer service
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Source: Company information
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Morses Club is operating under interim permission whilst its application for full authorisation is being reviewed
Regulatory Overview
• The Directors believe that the Company complies with all relevant legislation, secondary legislation, regulation and practice applicable to UK HCC lenders
• We expect to receive full authorisation in due course, alongside other major UK HCC lenders
• Increasingly robust regulatory landscape will provide a continuing opportunity for market consolidation
• Currently over 400 owner operators in the sector, a number of whom may look to exit the market
• Variation to permission to enter the on-line loan market already submitted to the FCA for review
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Morses Club made three acquisitions in H1, has completed 2 since the half year with one more pending
completion
H1 2016/17 acquisitions and pipeline
Source: Company information
Acquisition 1 Acquisition 2 Acquisition 3 Acquisition 4 Acquisition 5 Acquisition 6
Completion date 18-Apr 20-Jul 10-Aug 15-Sep 28-Sep Tbc
Staff 18 3 3 28 2 3
Agents 44 13 22 65 9 6
Customers 7,516 869 2,147 6,600 1,396 1,610
Book debt purchased £1,807k £562k £802k £2,240k £1,000k £600k
• Total Loan book purchases of £6.4m to early October
• Key staff and employed agents acquired alongside loan books
• Acquired books typically made up of lower duration products, as is usual for smaller operators
• High percentage of cash collections on books purchased
• Standard pricing methodology in place
• Allows the Company to make an offer quickly following target identification
• No issues have been expressed by the FCA regarding the 6 acquisitions
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Conclusion
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Well-positioned for growth
Conclusion
• Trading in-line with the Boards expectations and confident in performance for H2
• We expect the benefits of the acquisitions made during H1 to be realised in H2
• Many of our recent territory builds will reach maturity in the forthcoming period
• Highly invested IT platform will start to yield cost savings in H2 and beyond
• The same IT platform will support our endeavours in customer longevity, loyalty and referral growth in HCC as well as in our new online instalment business
• Success in on-line lending for MCL will be based on
• Having existing customer interest
• Experienced management with highly transferrable skill set
• Expert supply chain support
• Existing, scalable back office systems and staff – no need for large investment in these areas
• Technology components are now “off the shelf” versus competition who had to invest in bespoke systems and meet more challenging sales targets in order to absorb costs
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Appendices
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15%
14%
13%
12%
12%
11%
11%
10% 3%
Location of agents
North WestScotlandNorth EastWest MidlandsSouth EastHumberside / East MidlandsSouth West & WalesYorkshireNorthern Ireland
A truly national footprint
No. 2 market player with UK-wide presence - c. 1,800 agents across the country
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Note: Points on map indicate office locations
Source: Company information
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(1) As at February 2016
(2) As at February 2016
(3) As at February 2016
(4) Independent customer satisfaction surveys carried out by Mustard (May-August 2016)
Source: Company information
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Customer KPIs
Historic loans per customer: % of total loan value(2) Historic loans per customer: % of total number of loans(1)
Customer satisfaction(4) Proportion of loans held by age group(3)
Volume as %
Band Feb-15 Aug-15 Feb-16 Aug-16
1 15.1% 16.6% 17.4% 19.2%
2 to 5 35.0% 32.1% 32.3% 34.1%
6 to 10 17.4% 17.5% 17.4% 16.4%
11 to 15 9.0% 9.2% 9.3% 8.7%
16 to 20 4.6% 4.7% 4.7% 4.4%
20+ 18.9% 20.0% 18.8% 17.3%
Value as %
Band Feb-15 Aug-15 Feb-16 Aug-16
1 4.6% 6.3% 5.9% 7.0%
2 to 5 23.4% 20.8% 22.1% 24.1%
6 to 10 18.4% 18.5% 18.5% 17.9%
11 to 15 12.1% 12.0% 12.3% 11.7%
16 to 20 6.8% 6.8% 6.9% 6.6%
20+ 34.8% 35.6% 34.4% 32.6%
Customers as %
Band Feb-15 Aug-15 Feb-16 Aug-16
18 to 25 3.9% 5.1% 6.2% 7.2%
26 to 35 20.5% 21.8% 22.9% 24.1%
36 to 50 35.8% 35.2% 34.8% 34.3%
51 to 65 27.1% 25.9% 24.8% 23.8%
66+ 12.7% 12.0% 11.3% 10.7%
87.10%
9.75%
2.25% 0.25%
0.65% Very Satisfied
Fairly Satisfied
Neither Satisfied or
Dissatisfied
Fairly Dissatisfied
Very Dissatisfied
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Products
Illustrative pricing and repayments by product
Term Issue
Value
Credit
charge
Total
payable
Weekly
payment
Of which
Charge
as % APR
Principal Interest
20 weeks £400 £200 £600 £30 £20 £10 50% 765.5%
33 weeks £400 £260 £660 £20 £12 £8 65% 433.5%
52 weeks £400 £328 £728 £14 £8 £6 82% 272.5%
78 weeks £400 £380 £780 £10 £5 £5 95% 172.0%