Gokul Ponnuraj of Bavaria Industries Group presented his in-depth investment thesis on Norwegian Finans Holding (Norway: NOFI) at European Investing Summit 2018.

Thesis Summary:

Norwegian Finans Holding is a well-run digital unsecured consumer lender available at an attractive valuation. While the risks of investing in an unsecured lender at a late stage of the economic cycle are self-evident, the recent price provides an attractive entry point into a well-run fintech company with structural growth opportunities from market share gains and new product launches.

The shares recently traded at 10.5x trailing earnings and 2.9x price to book, while the business generates ROA of 4+% and ROE of ~30%. A key risk is the weak financial position of the parent airline. Though there is no direct contingent liability and the contract terms with the airline have been extended for ten years, the strength of the brand and origination platform depends on the dominance of the airline.

Bank Norwegian started operations in 2007 and offers consumer loans, credit cards, and deposit accounts to retail customer, distributed through the Internet in the Nordic market. The credit cards are linked to the rewards scheme of the parent, Norwegian Air. The bank entered Sweden in 2013 and Denmark and Finland in 2015. The bank recently had more than one million credit card customers, 190,000 installment loans, and 190,000 deposit customers. It has built up from scratch a loan and deposit book of BOK 37 billion over a decade with a pioneering online distribution model. The efficient operation has a ratio of cost to income (excluding marketing) of less than 10%, enabling the bank to gain share from incumbents.

The business model, with app-based distribution, is scalable, as can be seen from a net interest income CAGR of ~30% over the last five years, with an employee base of fewer than seventy people.

The balance sheet is strong and liquid, with debt to equity of 6x and liquid assets at 24% of balance sheet assets. The liability franchise is strong, with a deposit-to-loan ratio of 1.06. The company has fully funded loan growth over the years through the retail deposit base (not via wholesale liabilities). The spreads have been sticky, and the core differentiator is origination strength. Management has executed in a disciplined manner in terms of managing credit risks through risk selection, provisioning, and bad loan sales.

Gokul’s variant perception centers around the market’s concern around higher competitive intensity, growth tapering off, increased credit costs, and regulatory scrutiny. The market appears to be overlooking the segmental profit mix, recurring revenue base, scale advantages, provision cover, creditor powers in the Nordics, a high-engagement distribution platform, credit card stickiness, seasoning of the portfolio, cross-selling opportunities, and embedded growth optionality.

The recent share price offers an opportunity to enter into a long-term compounder at an undemanding valuation, tilting the risk-reward in favor of the investor.

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About the instructor:

Gokul Ponnuraj is a value investor with a focus on small- and mid-cap spinoffs and compounders. He has been investing in the Indian markets for more than ten years and in global markets for the last two years. Gokul manages the public equities portfolio at Bavaria Industries Group. The firm uses its balance sheet assets (permanent capital) to invest in opportunities with an attractive risk-reward tradeoff. Gokul holds a Master in Finance degree from London Business School.