crl corporate update - 22 04 2015 - upgrade to a strong buy.pdf

8/9/2019 CRL Corporate Update - 22 04 2015 - Upgrade to a Strong BUY.pdf

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Corporate Update

FC ResearchAnalyst: Reshan Wediwardana

SRI LANKA

SOFTLOGIC FINANCE PLC STRONG BUY

CRL.N0000 APR 2015

“New Clientele Bigger Profit”

Softlogic Finance (CRL) as one of the fast growing finance companies in Sri

Lanka is expected to achieve a 101% earnings growth amidst changing focus

on credit disbursement portfolio to high yielding segments, lowering

impairment stemming from leases and higher purchases and increasing

presence of branch network. We expect CRL to achieve an EPS of LKR 9.0 inFY16E leading to a PER of 4.4x and PBV of 1.0x compared to sector average of

11.2x and 1.6x respectively. FC Research expects a total return of c.58% by

FY16E, based on a target price of LKR 65.0 (+54%) and a dividend yield of 3.6%.

Changing clientele may generate 32% growth in NII in FY16E: CRL has been

changing its product mix and focus from leases and hire purchases to Micro

finance in order to capture high yielding niche market segments by developing

innovative products. Hence, we expect net interest income to grow by 32% to

LKR 2bn in FY16E attributing to high yielding loans and advances growth of 25%

to LKR 11.5bn in FY16E. Further, we maintain our conservative forecast for

leases and hire purchases growth at 17% to LKR 8bn.

Efficient cost management and lowering impairment may drive +101% profit

growth in FY16E: We expect CRL’s to lower impairment compared to FY15 due

declined exposure in leases and hire purchase portfolio. Further, strategic

branch expansion and cost management measures are expected to improve

CRL’s cost-to-core-income ratio to 63% in FY16E from 67% in FY15E.

CRL may provide a total 1-year return of 58%: CRL at LKR 40.0, trades on a FY16E

PER of 4.4x and PBV of 1.0x. The counter may also provide a DPS of LKR 1.5 for

FY15E and LKR 3.1 for FY16E, which may translate into a dividend yield of 3.8%

and 7.6% respectively. On justified book value CRL is valued at LKR 58.0 while on8.0x FY16E average PER the company is valued at LKR 72.0. On average we

provide a target price of LKR 65.0 for CRL for a 1-Year period providing a total

return of 58% - BUY.

Current Price: LKR 40.0 Fair Value: LKR 65.0

Figure 1: CRL Price Volume Graph

-

100

200

300

400

500

600

700

800

900

30

32

34

36

38

40

42

44

46

48

50

Apr-14 Jul-14 Oct-14 Jan-15

( ' 0 0 0 )

P r i c e

Volume Price

KEY DATA

Share Price (LKR)

Average Daily Volume (Shares) 37,199

Average Daily Turnover (LKR mn) 1.54

Market Capitalisation (LKR mn) 1,855

Price Pe rformance 1 mth 3 mths 12mths

CRL -17.2% -24.0% 12.7%ASPI -3.2% -9.3% 12.8%

62.38%

14.35%

4.11%

2.78%

1.90%

Public Holdings 36.95%

40.00

52w High/Low (LKR) 49.0/31.0

ssued Share Capital (Shares mn)

Major Shareholders as at 30th December 2014

Softlogic Capital PLC

Vanik Incorporation PLC

B Finance PLC

Royal Ceramic Lanka PLC

Associated Electrical Corporation Ltd

(Source: www.cse.lk)

P/E 31 Mar FY13 FY14 FY15E FY16E FY17E

Net Interest Income (LKR mn) 2,278 3,339 3,948 4,961 6,005

Net Profit (LKR mn) 164 166 227 457 578

EPS (LKR) 3.2 3.3 4.5 9.0 11.4

YoY % Growth 36% 1% 37% 101% 26%

Valuations

PER (x) 12.4x 12.3x 8.9x 4.4x 3.5xPBV (x) 1.7 1.6 1.0 0.8 0.6

Dividend Yield (%) 2.8% 2.8% 3.8% 7.6% 9.7%

NAVPS 23.7 25.8 38.8 49.3 62.5

Adjusted DPS (LKR) 1.1 1.1 1.5 3.1 3.9

Dividend Payout 34% 34% 34% 34% 34%

Disclaimer on Shareholding:

First Capital Holdings does not hold positions in CRL

except for 669,642 shares in First Capital Limited.

First Capital has not taken any positions in TJL in the

3 trading days prior this report while it does not

envisage taking positions in this share for the

succeeding 7 trading days to this report.


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FC Research

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1.0 Changing clientele may generate 32% growth in NII

in FY16E

Focus on niche-micro finance disbursement: CRL has newly instigated

focus on lending towards micro finance sector with lower risk profiles

which has enabled the company to gain higher net interest margins. The

novel micro product range which consist of group loans and cluster

financing (loans given to School Teachers, Government Servants and

etc…) is expected to generate an average yield of 27% in FY16E as

opposed to 26% in FY15E. We expect CRLs new loan portfolio to achieve

a 25% growth in FY16E generating a net interest income of LKR 2bn.

Booming credit demand in focused segments: We expect credit growth

to pick up in selected segments in CRL’s lending portfolio mainly from

the increasing salaries of state employees proposed by the interim

budget 2015. This may drive disbursements mainly in micro loan

segment which is currently not being touched by the commercial banks.

Lowered exposure in leases and hire purchases portfolio: CRL is

currently in a process of gradually tumbling its leases and hire purchases

portfolio due to immense competition in the sector mainly coming from

commercial banks and other large players in the industry. Though there

is a strong demand existing in the industry due to improved consumer

demand, banks and large finance companies have been capturing the

market with attractive rates.

Figure 3: Loans, Leases and Hire Purchases Growth QoQFigure 2: Loans, Leases and Hire Purchases - Quarterly

3

4

5

6

7

8

9

10

1QFY14 2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15

L K R B n

Lease and hire purchase receivables Loans and receivables

5% 2%

0%

7%

-12%

-19%

5%

-15%

6%

-6%

62%

56%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

2QFY14 3QFY14 4QFY14 1QFY15 2QFY15 3QFY15

G r o w t h Q o Q


(Source: Quarterly Reports)(Source: Quarterly Reports)


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FC Research

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2.0 Efficient cost management and lowering

impairment may drive +134% profit growth in FY16E

Lowering impairment in line with dip in leases and hire purchases: CRL

incurred an impairment of LKR 328mn for FY14 and LKR 365mn in

9MFY15 mainly coming from repossessed vehicles, leases and hire

purchases. With the decline in lease and hire purchase portfolio, we

expect impairment to be moderate in FY16E and FY17E. However, beingconservative, for micro finance portfolio we have taken average

impairment level being used by other peers in the sector to formulate

our valuations. (5% of total disbursement)

Figure 6: Classification of Impairment in FY14

Figure 4: Leasing Rates Figure 5: Change in Disbursement Focus

20.6% 20.1%

17.5%

22.7%

34.1%

PLC CFIN LFIN COCR CRL

Lease and hire

purchase, 66%

Loans and

receivables,

29%

Other

receivables, 2%

Repossessed

vehicle stock,

3%

8,3446,381

3,6779,258

9MFY14 9MFY15


(Source: FC Research Mistry Research Survey) (Source: Quarterly Reports)

(Source: Annual Reports)

LKR 400,000 leasing for a three wheeler

which is oin to mature in 4 ears.


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FC Research

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Efficient cost management may further support profitability: We

expect CRL to improve its cost to income ratio to 57% in FY16E as

opposed to 61% in FY14 mainly driven by higher net interest income

stemming from the niche market approach. Fee based income may also

support to gain higher profit growth amidst higher other operating

income.

3.0 CRL may provide a total 1-year return of 72%:

CRL at LKR 40.0, trades on a FY16E PER of 4.4x and PBV of 1.0x. The

counter may also provide a DPS of LKR 1.5 and LKR 3.4 for FY15E and

FY16E, which may translate into a dividend yield of 3.8% and 7.6%

respectively.

75%

71%

61% 62%

57% 57%

FY12 FY13 FY14 FY15E FY16E FY17E

(Source: Annual Reports and FC Research Estimates)

Figure 7: Cost to Income - Annual

P/E 31 Mar FY13 FY14 FY15E FY16E FY17E

Net Interest Income (LKR mn) 2,278 3,339 3,948 4,961 6,005

Net Profit (LKR mn) 164 166 227 457 578

EPS (LKR) 3.2 3.3 4.5 9.0 11.4

YoY % Growth 36% 1% 37% 101% 26%

ValuationsPER (x) 12.4x 12.3x 8.9x 4.4x 3.5x

PBV (x) 1.7 1.6 1.0 0.8 0.6

Dividend Yield (%) 2.8% 2.8% 3.8% 7.6% 9.7%

NAVPS 23.7 25.8 38.8 49.3 62.5

Adjusted DPS (LKR) 1.1 1.1 1.5 3.1 3.9

Dividend Payout 34% 34% 34% 34% 34%


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FC Research

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On justified book value CRL is valued at LKR 57.6 while on 8.0x FY16E

average PER the company is valued at LKR 72.0. On average we provide

a target price of LKR 65.0 for CRL on 1 Year period providing a total

return of 58% - BUY.

3.1 Justified PBV

3.2 PE Band

Figure 8: PE Band

(Source: www.cse.lk and FC Research Estimates)

Justified PBV based Valuation FY16E

ROAE 20%

Growth 3%

COE 18%

PBV 1.2

NAVPS 49.3

Fair Value 57.6

COE (K e)

Rf 8%

Rm 14%

1.80

Ke=Rf + (Rm-Rf ) 18%

PE band based based Valuation FY16E

EPS for FY16E 9.00

Average PER 8.0xFair Value 72

-

20

40

60

80

100

120

140

Jun-09 Jun-10 Jun-11 Jun-12 Jun-13 Jun-14 Jun-15 Jun-16

P R i c e - L K R

4.0x 6.0x 8.0x 10.0x 12.0x Price


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FC Research

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3.3 Fair value of LKR 71.0 and total return of 72%

Expected CRL price for FY16E

PER based target price 72

Justified PBV based target pric 58

Average Fair Value 65

CRL price for FY16E

Return

Target Price 65

Current Price 42

Dividend FY15E 1.5

Capital Gain % 54%

Dividend Yield % 3.6%

Total Return % 58%


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Appendix 1 – Ratio Analysis

Ratio Analysis FY12 FY13 FY14 FY15E FY16E FY17E FY18E

Capital

Equity / Assets 11.0% 9.1% 7.2% 9.6% 9.8% 10.2% 10.6%

Earnings

Return on Average Equity 14.9% 14.2% 13.2% 13.8% 20.4% 20.4% 18.9%

Return on Average Assets 1.7% 1.4% 1.1% 1.2% 2.0% 2.0% 2.0%

Avg. yield on earning assets 24.9% 23.9% 27.2% 26.1% 27.3% 27.5% 27.5%

Avg. cost of funds 13.2% 14.2% 15.2% 14.1% 14.4% 14.6% 14.6%

Net Interest Spread 11.7% 9.7% 11.9% 12.0% 12.9% 12.9% 12.9%

Net Interest Margin 12.0% 9.3% 10.4% 10.4% 11.4% 11.1% 11.1%

Cost / Core-income 77% 78% 63% 67% 63% 63% 63%

Cost / Income 75% 71% 61% 61% 60% 59% 59%

Cost / Average Assets 8.4% 6.4% 5.6% 5.9% 6.1% 5.9% 5.8%

Cost / Branch (Rs.'Mn) 38.2 43.7 51.6 52.3 51.9 51.9 53.4

Rev. / Employee (Rs.'Mn) 1.476 2.245 2.855 2.520 2.632 2.825 3.046

Asset Quality

Asset Growth 128% 31% 38% 13% 24% 22% 20%

Deposit Growth 195% 49% 34% 30% 25% 23% 22%

Borrowings Growth 54% -38% 209% -15% 20% 18% 10%

Loans & advances Growth 279% 50% 16% 137% 25% 21% 21%

Leases & higher purchases Growth 79% 20% 15% -15% 17% 17% 17%

Total Lending Growth 109% 28% 15% 33% 21% 19% 19%

Liquidity

Loan / Deposits 176% 152% 131% 134% 130% 126% 123%

Loan / Funds 131% 182% 107% 164% 165% 167% 178%Loan / Total Assets 82% 80% 67% 79% 77% 76% 75%

Deposit / Liabilities 52% 58% 55% 65% 66% 67% 68%

Employees 550 467 502 748 891 992 1,092

Branches 16 17 17 22 27 32 37

New Branches during the Year 0 1 0 5 5 5 5



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Appendix 2 – Income Statement

Income Statement

P/E 31 March FY12 FY13 FY14 FY15E FY16E FY17E

Interest Income 1,534 2,278 3,339 3,948 4,961 6,005

Interest Expense (793) (1,391) (2,058) (2,377) (2,885) (3,578)

Net Interest Income 741 886 1,281 1,572 2,075 2,426

Fees and Commission Income 48 69 119 134 166 194

Net Trading Income 5 31 21 53 62 85

Other Operating Income 18 62 13 126 42 97

Total Operating Income 812 1,048 1,433 313 270 376

Impairment Charge / (Reversal ) for Loans and

Advances6 73 328 404 206 210

Net Operating Income 806 975 1,105 1,481 2,139 2,592

Personnel Expenses 214 239 288 468 625 779

Depreciation of Property, Plant and Equipment 26 44 50 71 83 95

Amortization of Intangible Assets 1 2 3 6 10 14

Other Operating Expenses 369 457 535 605 683 772

Total Operating Expenses 611 742 877 1,151 1,401 1,661

Operating Prof it Before Value Added Tax (VAT) 195 233 228 330 737 931

Value Added Tax (VAT) on Financial Services 30 37 37 60 102 128

Profit Before Income Tax 165 196 191 270 635 803

Income Tax Expense 44 32 26 43 178 225

Profit for the Year 121 164 166 227 457 578

EPS 2.4 3.2 3.3 4.5 9.0 11.4



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Appendix 3 – Statement of Financial Position

Statement of Financial Position

P/E 31 March FY12 FY13 FY14 FY15E FY16E FY17E

Assets

Cash and cash equivalents 1,104 1,473 2,431 2,064 3,002 4,206

Financial investments - Available for sale 70 115 1,515 50 61 104

Financial investments - Held for trading - 79 85 123 142 163

Lease and hire purchase receivables 6,005 7,222 8,325 7,058 8,241 9,642

Loans and receivables 2,241 3,353 3,887 9,207 11,473 13,853

Other non financial assets 472 792 1,693 1,816 2,270 2,792

Intangible assets 7 8 10 24 35 44 Property, plant & equipment 176 178 312 316 315 309

Total Assets 10,076 13,219 18,260 20,659 25,538 31,113

Liabilities

Due to banks 1,153 2,653 1,597 1,627 1,971 2,350

Derivative financial instruments - - 11 - - -

Due to customers 4,682 6,957 9,313 12,107 15,133 18,614

Other borrowed funds 2,564 1,581 4,888 4,159 4,983 5,860

Other non financial liabilities 481 744 1,073 724 877 1,046

Retirement benefit obligations 12 14 22 22 22 22

Deferred tax liabilities 75 65 47 47 47 47 Total Liabilities 8,968 12,014 16,950 18,684 23,034 27,938

Equity Attributable to Equity Holders of the Parent

Stated capital 1,003 1,003 1,003 1,405 1,405 1,405

Statutory reserve fund 13 43 76 121 213 329

Investment fund reserve 21 48 76 144 281 455

Retained earnings 79 130 142 292 594 976

Available for sale reserve (8) (19) 12 12 12 12

Total Equities 1,108 1,205 1,310 1,974 2,505 3,176

Total Liabilities and Equity 10,076 13,219 18,260 20,659 25,538 31,113

NAVPS 22 24 26 39 49 62



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Appendix 4 – Peer Comparison

Softlogic Finance CRL.N0000 39.5 4.1 29.2 9.6x 1.4x

Commercial Credit And Finance COCR.N0000 52.7 6.2 17.0 8.5x 3.1x

People's Leasing & Finance PLC.N0000 23.0 2.6 13.2 8.8x 1.7x

Central Finance Company CFIN.N0000 252.9 34.3 223.7 7.4x 1.1x

LB Finance LFIN.N0000 164.0 30.3 106.8 5.4x 1.5x

Lanka Orix Finance LOFC.N0000 4.0 0.5 2.8 7.8x 1.4x

Commercial Credit And Finance COCR.N0000 52.7 6.2 17.0 8.5x 3.1x

Citizens Development Business Finance CDB.N0000 85.0 11.0 71.1 7.7x 1.2x

Commercial Leasing & Finance CLC.N0000 4.1 0.2 1.6 19.3x 2.6x

Mercantile Investments And Finance MERC.N0000 2,200.0 189.0 2,562.7 11.6x 0.9x

Alliance Finance Company ALLI.N0000 800.0 126.2 1,010.5 6.3x 0.8x

The Finance Company TFC.N0000 15.5 (12.2) (61.6) -1.3x -0.3x

Senkadagala Finance SFCL.N0000 60.0 8.2 36.8 7.3x 1.6x

Softlogic Finance CRL.N0000 39.5 4.1 29.2 9.6x 1.4x

Vallibel Finance VFIN.N0000 46.1 8.5 33.8 5.4x 1.4x

Singer Finance SFIN.N0000 19.5 2.1 13.6 9.3x 1.4x

Sinhaputhra Finance SFL.N0000 174.8 16.3 165.1 10.7x 1.1x

AMW Capital Leasing And Finance AMCL.N0000 22.4 10.7 57.0 2.1x 0.4x

Nation Lanka Finance CSF.N0000 4.4 0.3 1.2 14.4x 3.7x

People s̀ Merchant Finance PMB.N0000 24.5 (1.3) 14.0 -19.2x 1.8x

Orient Finance ORIN.N0000 12.5 0.5 7.6 22.8x 1.6x

Arpico Finance Company ARPI.N0000 158.9 30.8 117.4 5.2x 1.4x

Asia Asset Finance AAF.N0000 1.8 0.1 1.5 14.4x 1.2x

Swarnamahal Financial Services SFS.N0000 1.9 (1.5) (2.5) -1.2x -0.8x

Abans Finance AFSL.N0000 26.1 1.6 13.9 16.3x 1.9x

Associated Motor Finance Company AMF.N0000 437.9 52.9 132.4 8.3x 3.3x

Brac Lanka Finance NIFL.N0000 9.3 0.2 5.7 49.6x 1.6xTrade Finance & Investments TFIL.N0000 27.0 3.2 15.5 8.5x 1.7x

Bimputh Finance BLI.N0000 40.0 2.1 15.6 19.4x 2.6x

George Steuart Finance GSF.N0000 23.1 (2.3) 11.1 -10.2x 2.1x

Multi Finance MFL.N0000 26.3 (0.9) 12.4 -30.4x 2.1x

Chilaw Finance CFL.N0000 24.8 1.2 15.6 20.7x 1.6x

SMB Leasing SEMB.N0000 1.0 0.1 0.6 19.9x 1.7x

Capital Alliance Finance CALF.N0000 14.6 0.2 8.4 80.7x 1.7x

PBVName Symbol Price Trailing 12

monthsNAVPS PER

(Source: Quarterly Reports)


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Appendix 5 – Sensitivity Analysis

a. Growth Vs. Cost of Equity

57.6 1% 2% 3% 4% 5%

15% 68.3 69.8 71.5 73.5 76.0

16% 63.8 64.8 66.0 67.4 69.1

17% 59.8 60.5 61.3 62.2 63.3

18% 56.6 57.1 57.6 58.2 58.9

19% 53.2 53.4 53.6 53.9 54.3

20% 50.4 50.4 50.5 50.6 50.6

21% 47.8 47.8 47.7 47.6 47.5

Growth

Cost of Equity


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FC Research

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Disclaimer:

This Review is prepared and issued by First Capital Equities (Pvt) Ltd. based on information in the public domain, internally developed and other sources, believed to be correct. Although all reasonable care

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