Capital Alliance Plc the Biggest Where Size Matters
Transcript of Capital Alliance Plc the Biggest Where Size Matters
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Peoples Leasing CompanyTheBIGGEST!Where size matters
CAL ResearchOctober 2011 See p. 30 for important disclaimers
Recommendation
BUY
FY12 Target price
Rs. 25.00
Issue price
Rs. 18.00
No. of shares offered
390,000,040
Amount to be raised
Rs. 7,020 m
Issue opening date
03-Nov-11
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50
100
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2009 2010 2011 2012E 2013E 2014EPLCg
rouptotalassetsRs.
billion
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Contents
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I. Leasing and hire purchase sector primedfor explosive growth on vehicle boom
II. Dominating the leasing and HP market,PLC is poised to prosper
III. 2012 forecasts suggest a 40% upside toIPO price
IV. Appendices
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IPO price of Rs.18 per share represents 7.2x PER and 1.4xPBV on FY12 forecasts
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Figure 1: PLC group earnings 2010-14E
Source: CAL Research estimatesSource: Peoples Leasing Company Annual Reports
YEAR END 31 MARCH 2010 2011 2012E 2013E 2014E
Net Interest Income (Rs.mn) 3,454 5,014 8,422 12,475 15,475
Net Profit (Rs.mn) 1,153 2,605 4,538 5,012 6,606
Recurring Net Profit (Rs.mn) 1,153 2,149 3,308 4,848 6,450
Adjusted EPS* 0.78 1.84 2.48 3.11 4.13YoY EPS Growth 18% 135% 35% 25% 33%
PER (x)* 23.0 9.8 7.2 5.8 4.4
PBV (x)* 4.5 3.3 1.4 1.2 1.0
Growth in Lending 27% 95% 77% 38% 23%
Return on Avg. Equity 20% 36% 32% 23% 26%Total shares prior to IPO (mn) : 1,170
Share issued to the public (mn) : 390
Total shares after IPO (mn) : 1,560
*Forecast sha re capital consi st of the total sha res includi ng the s hares i ss ued for IPO
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Recommendation: BUY, FY12 target price - Rs.25/-
Led by a forecast 81% increase in vehicle numbers, the leasing andhire purchase industry is likely to grow c.6x by 2018.
Dominating the leasing and HP sector at nearly twice the size of itsclosest peer, PLCs group assets are likely to grow c.3x by 2014,
resulting in a recurring earnings Cagr of 44% FY2012-14E, includinga c.54% growth in recurring earnings by FY12.
Given our 2012 forecasts, to be comparable to peers PLC shouldtrade at c.Rs.25/- per share (2x FY12E book-value and 10.8x FY12Eearnings), up 40% from the IPO price
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I. Leasing and hire purchase sectorprimed for explosive growth onvehicle boom
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Post-war Sri Lankas real GDP per capita could grow fromUS$2,400 today to US$3,900 by 2018
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Figure 2: Forecast real GDP per capita (US$)
US$2,400
US$3,900
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2,500
3,000
3,500
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4,500
2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
GDPperCapita(CurrentUS
$)
Actual Forecast
Estimated realGDP growth at:2011 = 8.0%2012 = 7.6%2013+ = 6.9%
Source: CAL Research estimatesSource: Frontier Research
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Sri Lankas current GDP per capita suggests accelerated
vehicle ownership growth if past trends hold true
Historically, US$1,000-5,000 GDP per capita drives vehicle growth of up to 2xGDP. SLs US$2,400 GDP per capita suggests vehicle growth of 1.3xGDP, or +8% p.a.
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Source: Vehicle Ownership and Income Growth, Worldwide: 1960-2030, Joyce Dargay, DermotGately and Martin Sommer, Energy Journal, 2007, Vol. 28, No. 4
Figure 3: Long-run income elasticity of vehicle ownership
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800k rise in vehicle sales since 2009 due to reduced importduties and lower interest rates further illustrates demand
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Figure 5: New vehicle registrations, SriLanka, 2006-2011 (July)
150,000
200,000
250,000
300,000
350,000
400,000
450,000
500,000
2006 2007 2008 2009 2010 1H 2011
From June
2010, excisetax on motorvehicles wasreduced byapprox 50%
From April 2011,excise duty onpetrol vehicleswas increased by
38-43% andhybrid cars wereassigned a dutybetween 8-100%
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Avera
geweightedprimelendingra
te(%)
Figure 4: Average weighted primelending rate (weekly)
Source: Central Bank of Sri LankaSource: Department of Motor Traffic
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An expected 81% growth in vehicle numbers could deliver ac.6 fold increase in the leasing and HP sector by 2018,mainly due to increasing values and refinancing
We believe vehicle population will grow 81% by 2018 (8% Cagr 2011-18E) Vehicle growth is expected to lead the leasing and HP sector to a six-fold increase, which
translates to a 25% Cagr 2011-18E. Historical trends suggest that 50% of all new vehicleregistrations go through leases (83% of new buses & lorries are leased)
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2010 2018Numberof
vehicles(million)
Others Motorcycles Motor cars
4.0 mn
7.2 mn
Motor cars Motorcycles Others
2010 2018 est.
US$11.2 bn
US$1.9 bn
(Rs.1,236 bn)
(Rs.213 bn)
Figure 7: Leasing and HP forecastFigure 6: Vehicle forecast
Source: CAL Research estimates
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II. Dominating the leasing and HP market,PLC is poised to prosper
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Figure 8: Leasing and HP asset base of the largest players in the industry, 2011
PLC accounts for nearly twice the leasing and HP assets ofits closest competitor
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PLC LOLC LFIN CFIN
Lease&hirepurchaseassetsR
s.
billion
Source: Annual Reports of the companies
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Figure 9: Vehicle mix of leasing and hire purchase advances, 2011
Lorries34%
Buses32%
MotorCars24%
Dual
Purpose9%
Bikes &Three
Wheelers DualPurpose
27%
Lorries26%
MotorCars22%
Buses20%
Bikes &
ThreeWheelers
Leasing Advances Hire Purchase Advances
75% of leasing advances and 73% of hire purchase advances as of 31 March 2011 have beenextended to income-generating vehicles (lorries, buses and dual purpose vehicles).
Funding a diversified set of income-generating vehiclesreduces PLCs concentration risk and allows it to capitalise
on economic prosperity
Source: Peoples Leasing Company Annual Reports
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PLC is well positioned to take advantage of growth in thesector and increase its assets by c.3 fold through FY14
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Figure 10: PLCs total assets, 20092014E
Source: CAL Research estimates
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2009 2010 2011 2012E 2013E 2014E
TotalAssetsRs.
billion
Asset Base Asset Growth
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A large asset base and a credit rating of A allows PLC to
source funds lower than its peers...
Figure 11: Decline in cost of funding among RFCs and SLCs
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BB- BB A- BBB+ BBB- BBB BBB+ BBB BBB- A A- BBB+ A+ A
TotalAssetsRs.
billion
Averagecostoffunding(%)
Total assets Avg cost of funding Linear (Avg cost of funding)
People's Leasing Finance(Subsidiary of People's Leasing)
People's Leasing Company
Source: Annual Reports of the companies
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...which enables the company to maintain margins whilstincreasing its asset base
From 2009 to 2011, PLCs Net Interest Margin ranged between c. 11-13% due to favourableinterest rate movements. We expect margins to hold at a respectable 9-10% from 2012 to 2014.
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Figure 12: Net profit against net interest spread & net interest margin, 200914E
Source: CAL Research estimates
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2009 2010 2011 2012E 2013E 2014E
NetProfitRs.
billion
Net Profit Net Interest Spread Net Interest Margin
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NPL ratio of 1.2% (lowest among peers) illustrates PLCs
capability to grow assets whilst maintaining superior assetquality
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Figure 13: NPL peer comparison
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CDB MERC LOFC LFIN CFIN PLC
NPL(%)
TotalAssetsRs.
billion
Total assets NPL
Source: Annual Reports of the companies
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PLCs mutually beneficial relationship with its parent,
Peoples Bank (PB), is likely to allow PLC to leverage off
PBs countrywide branch network for the foreseeable future
PLC is a 95% owned subsidiary of Peoples Bank (Post-IPO: 72%).
PLCs asset base is 10% of PBs asset base, but it contributes 30% of PBs profits.
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Figure 14: PLCs window offices as a
proportion of PBs branches
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124
200
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2009 2010 2011 2012E
No.o
fBranches/WindowOffices
People's Bank branches
People's Leasing Company window offices
5% 6%
10%
84%
86%
88%
90%
92%
94%
96%
98%
100%
2009 2010 2011
%
ofPeople'sBankTotalAsse
ts
People's Leasing Company People's Bank
Figure 15: PLCs total assets as a
proportion of PBs total assets
Source: Peoples Bank Annual ReportsSource: Peoples Leasing Company Annual Reports
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Expanding branches and window offices beyond theWestern province is likely to further help sustain low NPLs
Interest income has gradually shifted from the high-NPL Western province to the rest of thecountry, from 61% in 2009 to 55% in 2011.
Substantial growth in window branches outside the West is likely to see future NPLs at the 2%level or below.
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Figure 16: NPL by province, March2011
Province NPL RatioCentral 0.66%
Eastern 0.37%
Northern 0.38%
North Central 0.86%
North Western 0.74%
Sabaragamuwa 0.82%Southern 1.05%
Uva 0.43%
Western 1.63%
Company 1.21%
Figure 17: Asset base against NPL, 20092014E
Source: CAL Research estimatesSource: Peoples Leasing Company Annual Reports
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TotalAssetsRs.
billion
Asset Base NPL Ratio
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Window offices in Peoples Bank (PB) branches ensure the
lowest cost-to-income ratio compared to peers
PB is Sri Lankas second-largest bank in terms of asset base (Rs.619 bn) and has the biggestbranch network, with 330 branches and 358 service centers.
PLC has managed to open 121 window offices within PB branches, on top of its 37-branchnetwork, and intends to increase window offices to over 200 in 2012.
As a result, PLCs cost-to-income ratio is well below its peer group.
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Figure 18: Cost-to-income ratio peercomparison
Figure 19: PLC cost-to-income ratio
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CDB MERC LOFC LFIN CFIN PLC
Costt
oIncome(%)
29.0%
29.5%
30.0%
30.5%
31.0%
2009 2010 2011
Source: Annual Reports of the companiesSource: Peoples Leasing Company Annual Reports
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High brand recognition coupled with expanding branch andwindow office network will make PLC a household name.
Parent company Peoples Bank ranks #2 in the top 100 brands in Sri Lanka
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Figure 20: Finance & leasing companies in the top 100 most valuable brands in SriLanka (2011) against the number of branches*
Source: Brand Finance, 2011
CFIN
PLC
LFIN
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Top100Rank,
2011
Number of Branches*
LOFC
* Number of branches excludes service centres/kiosks, with bubble sizes scaled to assets
Source: Annual Reports of the companies
- Size of bubble indicates size of company based on total assets
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A high-growth industry, the backing of a large parent, andproven management capability should give PLC animpressive 44% 2012-14E earnings Cagr
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Figure 21: Earnings growth, 2009-11 historical and 2012-14 forecast
Source: Peoples Leasing Company Annual ReportsSource: CAL Research estimates
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2009 2010 2011 2012E 2013E 2014E
Growth(%)
Rs.
billion
Net Interest Income Net Profit Net Interest Income Growth Net Profit Growth
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III. FY12 forecasts suggest a 40% upsideto IPO price
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PLC has the best combination of trailing PBV (2.5x) andROE (35%) compared to the closest peers
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Figure 22: Return on equity against price to book value*, 2011
*Price to Book Value - prices at 12.10.2011
** Adjusted for an extraordinary item
PLC
CFIN
LFIN
LOFC**
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60%
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ReturnonEquity(%)
Price/ Book Value*
Source: Annual Reports of the companies- Size of bubble indicates size of company based on total assets
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...and the lowest forward PER (7.2x) and PBV (1.4x) vs. mostlarge RFCs and commercial banks
Figure 23: Comparative multiples in the Banking and Finance sector
Source: Annual Reports of the companies
NTB
LFINLFIN
NTB
Source: CAL Research/consensus estimates
COMB
CFIN
HNB
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PBV
PER
Current year forecasts PER(x) PBV(x)
Mar 2012E or Dec 2011E
PLC 7.2 1.4
NTB 9.0 1.4
LFIN 7.2 3.1
COMB 10.7 2.1
CFIN 11.9 2.5
HNB 12.0 1.7
PLC
- Size of bubble indicates the attractiveness of the valuations (1/(PER*PBV))
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Therefore, we believe PLC should trade at c.Rs. 25 per share(2x FY12E PBV and 10.8x FY12E PER)
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Figure 24: CAL Research forecast for PLC group
Source: CAL Research estimates
YEAR END 31 MARCH 2010 2011 2012E 2013E 2014E
Net Interest Income (Rs.mn) 3,454 5,014 8,422 12,475 15,475
Net Profit (Rs.mn) 1,153 2,605 4,538 5,012 6,606
Recurring Net Profit (Rs.mn) 1,153 2,149 3,308 4,848 6,450Adjusted EPS* 0.78 1.84 2.48 3.11 4.13
YoY EPS Growth 18% 135% 35% 25% 33%
PER (x)* 23.0 9.8 7.2 5.8 4.4
PBV (x)* 4.5 3.3 1.4 1.2 1.0Growth in Lending 27% 95% 77% 38% 23%
Return on Avg. Equity 20% 36% 32% 23% 26%
*Forecas t sha re capital consi st of the total sha res includi ng the s hares i ss ued for IPO
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Other key ratios
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Figure 25: Key forecast ratios for PLC group
Source: CAL Research estimates
YEAR END 31 MARCH 2011 2012E 2013E 2014E
Return on Average Equity 36% 32% 23% 26%
Return on Average Assets 5.4% 5.1% 3.7% 3.8%
Net Interest Spread 8.8% 8.1% 7.5% 7.0%Net Interest Margin 11.4% 10.4% 10.1% 9.7%
Deposit Growth 179% 70% 40% 25%
Borrowings Growth 107% 70% 40% 25%
Net Lending Growth 95% 77% 38% 23%NPL Ratio 1% 1% 2% 2%
Cost / Income 29% 31% 31% 32%
Gross Lending / (Deposits+Borrowing) 126% 128% 128% 126%
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IV. Appendices
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A. Income Statement
B. Balance Sheet
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Appendix A: Income Statement
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Figure 26: Income Statement PLC group
Source: CAL Research estimates
Profit & Loss Statement
Period Ending 31 March 2009 2010 2011 2012E 2013E 2014E
Gross Income 6,527 7,428 9,986 15,903 24,104 31,015
Interest Income 5,744 6,776 8,916 14,841 22,635 29,841
Less : Interest Expenses 3,339 3,323 3,902 6,419 10,161 14,366
Net Interest Income 2,405 3,454 5,014 8,422 12,475 15,475
Non-Interest Income 783 652 1,071 1,062 1,469 1,175
Net Income 3,188 4,105 6,084 9,484 13,943 16,650
Less : Non-Interest Expenses 981 1,232 1,788 2,905 4,303 5,328Operating Profit before Provisioning 2,207 2,873 4,296 6,579 9,640 11,322
Less : Loan loss Provisioning 55 540 52 -913 1,704 716
Operating Profit before Taxes 2,151 2,333 4,244 7,492 7,936 10,606
Less : VAT 270 275 401 786 654 996
Operating Profit before Corporate Tax 1,882 2,058 3,843 6,706 7,282 9,610
Less : Corporate Tax 843 906 1,231 2,146 2,330 3,075
Investment fund income 0 0 0 0 85 104
Profit for the Period for Group 1,039 1,152 2,612 4,560 5,037 6,639
Minority Interest 0 0 7 23 25 33
Profit attributable to Equity Holders 1,039 1,153 2,605 4,538 5,012 6,606
Recurring Profit for the Period 1,039 1,153 2,149 3,308 4,848 6,450
Recurring EPS 0.82 0.78 1.84 2.48 3.11 4.13
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Appendix B: Balance Sheet
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Figure 27: Balance Sheet PLC group
Source: CAL Research estimates
Balance Sheet
Period Ending 31 March 2009 2010 2011 2012E 2013E 2014E
Assets
Cash and short term securities 1,704 2,469 3,323 9,125 12,083 16,371
Inventories 163 45 269 269 269 269
Net Loans and Advances 1,063 1,770 3,345 6,000 8,332 10,242
Net Leases 21,471 26,739 52,284 92,288 127,469 156,680
Property, Plant & Equipment 628 980 1,624 2,457 3,395 4,173
Other Assets 509 887 3,006 3,315 3,119 3,781
25,538 32,890 63,852 113,455 154,667 191,517
Equity and Liabilities
Liabilities
Deposits 0 1,667 4,647 7,900 11,060 13,825
Borrowings 17,132 20,370 42,088 71,549 100,169 125,211
Other Liabilities 2,968 4,674 8,634 14,214 19,616 24,343
20,099 26,711 55,369 93,663 130,845 163,380
Shareholders Funds
Stated Capital 1,850 1,850 1,850 12,758 12,758 12,758
Statutory Reserve Fund 166 226 376 604 856 1,188Total Other Reserves 3,423 4,098 6,086 6,307 10,060 14,010
5,439 6,173 8,383 19,670 23,674 27,956
Minority Interest 0 6 100 123 148 181
5,439 6,179 8,482 19,792 23,822 28,137
Total Liabilities & Shareholders' Funds 25,538 32,890 63,852 113,455 154,667 191,517
NAVPS 4.65 5.28 3.35 12.61 15.18 17.92
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DisclaimerThis document has been prepared and issued on the basis of publicly available information, internally developeddata and other sources, believed to be reliable. Capital Alliance Securities (Private) Limited however does notwarrant its completeness or accuracy. Opinions and estimates given constitute a judgment as of the date of thematerial and are subject to change without notice. This report is not intended as an offer or solicitation for thepurchase or sale of any financial instrument. The recipient of this report must make their own independentdecision regarding any securities, investments or financial instruments mentioned herein. Securities or financialinstruments mentioned may not be suitable to all investors. Capital Alliance Securities (Private) Limited its
directors, officers, consultants, employees, outsourced research providers associates or business partner, willnot be responsible, for any claims damages, compensation, suits, damages, loss, costs, charges, expenses,outgoing or payments including attorneys fees which recipients of the reports suffers or incurs directly or
indirectly arising out actions taken as a result of this report. This report is for the use of the intended recipientonly. Access, disclosure, copying, distribution or reliance on any of it by anyone else is prohibited and may be acriminal offence.
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Contacts
Research Team
Tel No: +94 11 2317777 (General)
Email : [email protected]
Head of Research
Kishan Gunawardena
Tel No : +94 11 2317784
Email : [email protected]
Dimantha Mathew
Tel No : +94 11 2317746
Email : [email protected]
Udeeshan Jonas
Email : [email protected]
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