JKSB forecasts Central Finance FY12 earnings to grow by 42% to Rs. 2.6 b

John Keells Stock Brokers (JKSB) is forecast Central Finance to post Rs. 2.6 billion in earnings in FY 2012 up by 42% over the previous year. This assessment is following the release of FY12 first quarter earnings recently. Here are excerpts from JKSB’s earnings update on Central Finance.

Central Finance PLC (CFIN) is the largest RFC in Sri Lanka with a net asset base of over Rs. 11.4 bn and a total loan book exceeding Rs. 30.8bn as at the end of 1QFY12, representing 70.8% of the company’s assets. Its deposit base stood at Rs.19.6bn as at the end of 1QFY12, accounting for a 62% share of total liabilities.

The company currently operates 57 branches scattered island-wide including the Northern and Eastern provinces.

CFIN’s earnings grew two fold YoY to reach Rs.618.2m for 1QFY12. This was mainly on the back of a substantial increase in interest income of 15.1% YoY, and a continued reduction in interest expense of 1.5% YoY that translated to a sharp 27.2% growth in net interest income during 1QFY12.

The net leases and loans and advances segments grew at a healthy 8.4% and 7% during 1QFY12 over the respective FY11-end figures, with net disbursement exceeding Rs.2.2bn during the quarter. The growth in the loans and advances segment was mainly due to an increase in the hire purchase segment’s assets, which stood in excess of Rs. 10bn as at the end of 1QFY12, accounting for over 78% of total loans and advances. Receivables from vehicle hiring stood at over Rs.1.5bn of CFIN’s loans and advances portfolio as at the end of the quarter.

The lease, hire purchase and other loans segment contributed 80.7% of the company’s total income and 82% of operating profits during 1QFY12. Its operating profit margin improved substantially from 26% achieved in 1QFY11 to 39.2% in 1QFY12, while recording a significant 74.3% YoY growth in operating profits.

This was on the back of an 18.2% YoY growth in the segment’s income and a strong 14.7% YoY decline in segmental other operating and administrative expenditure, despite a 5.2% increase in interest expenses.

Lease and hire purchase loans accounted for over 91% of the company’s loan book as at the end of 1QFY12, with commercial vehicle finances arising from rural areas accounting for a majority of CFIN’s lease and hire purchase book.

The strong growth in vehicles sales following the duty reduction translated into higher demand for vehicle financing products, strategic tie-ups with motor companies, and aggressive marketing activities, resulting in strong growth in the lease and hire purchase segments.

The vehicle hire segment contributed 10.4% and 9.2% of the quarter’s total income and operating profits during 1QFY12. Its operating profit margin deteriorated to 34% during 1QFY12 from 41.3% achieved in 1QFY11.

The company’s conservative approach during FY11 resulted in its Gross NPL Ratio (inclusive of operating leases) declining to 2.6% (from 4.9% during FY10) and the Net NPL Ratio declining to 0.3%, one of the lowest in the industry. The company was able to maintain these ratios during 1QFY12 as well. Loan loss provision declined substantially to Rs. 41m during the quarter (compared to Rs.113.2m in 1QFY11), due to improved asset quality. Interest bearing liabilities of the company increased to Rs. 22bn during the quarter from Rs.21.48bn as at end of FY11, indicating a marginal growth of 2.5%, with deposits accounting for 89.1% and the balance being borrowings and debentures.

The company’s deposits base grew by 4.6% during the quarter from the FY11- end figure, with a net increase of Rs.909.3m. Interest on deposits accounted for over 90% of interest expenditure during 1QFY12. The majority of the deposits were term deposits. Renewal rates remained at approximately 90%.

Borrowings declined by a significant 11.7% during the quarter from the FY11- end figure to Rs.2.4bn, mainly due to retiring over Rs.1bn in bank borrowings and debentures. However, non-bank borrowings (which are fixed rate securitized borrowings) indicated a sharp increase of 54.7% during the quarter (from the FY11-end figure), with a net increase amounting to Rs.733m.

The Loans to Deposits Ratio increased marginally to 1.57x during 1QFY12 from 1.53x in FY11, given the growth in the company’s loan assets.  Other income grew by a sharp 31.7% YoY to reach Rs.114.1m primarily due to dividend income. Operating income declined by a marginal 4.1% YoY.

Operating costs grew by a marginal 0.6% YoY due to a 14.3% increase in personal expenditure, while premises, equipment and establishment expenses declined by 7% and 18.5% YoY respectively. CFIN’s cost efficiencies led to a decline in the Cost to Income Ratio to 43.7% during 1QFY12 from 44.3% in FY11. The Staff Costs to Non-interest Expenses Ratio increased to 43.5% from 39.6% in FY11.

VAT and tax expenditure during the quarter declined by 36.2% YoY and 5% YoY respectively, due to statutory reductions (as corporate tax declined from 35% to 28% and VAT on financial services declined from 20% to 12%), effective from April 2011.

The company maintained a Tier 1 Capital Adequacy Ratio and a Total Capital Adequacy Ratio of over 23% as at the end of 1QFY12, well above the industry required levels of 5% and 10% respectively and the sector averages.

The strong growth in earnings translated to a strong ROAA of 1.5% and an ROAE of 5.4% for 1QFY12.

Outlook and Valuations

Given CFIN’s large customer base, strong relationships with corporate clients and strong demand for vehicle financing products, we expect the company’s loan book to grow further to reach Rs.37.9bn in FY12.

The company expects to match the loan book growth with short term borrowings and internally generated cash.

A modest growth in deposits is anticipated due to availability of low cost borrowings. The company expects to increase its presence in strategic locations during FY12 (focusing on rural areas), with fully equipped branches which would provide one stop facilities for financial services.

Given the above, we expect CFIN to post Rs. 2.6bn in recurring earnings for FY12, representing a sharp 42% YoY growth.  This corresponds to a basic and diluted EPS (post the sub division and the consolidation of reserves) of Rs.128.03 and Rs.24.78 per share and basic and diluted BVPS of Rs.564.28 and Rs.109.22 respectively. The counter is currently trading at a PER of 10.6x on FY12E figures and a PBV of 2.4x at a market price of Rs.1,360.50 per share.