BUY
LOLC SEC Valuation LKR 329.60 Share Price (10.02.15) LKR 250.00 Upside/Downside +31.80% Risk Level Medium (refer page 21 for recommendation guidance)
Share Details
Bloomberg Ticker CFIN SL
CSE Sector Banks, Finance & Insurance GICS Sector Financials Market Cap (LKR Mn) 26,220 Issued Quantity (Mn) 104.883 30-day avg T/O (LKR Mn) 2.713 Beta (2 years) 0.940
Investment Fundamentals
LKR Bn 2014
A
2015
EE
2016F 2017F
Revenue 8.6 8.5 9.4 10.6 Net Profit 3.3 3.5 3.9 4.5 S/H’s Equity 20.9 24.5 28.3 32.8 Total Assets 65.4 77.7 89.8 103.8 ROA (%) 5.4% 4.9% 4.6% 4.6% ROE (%) 17% 15%
%
15% 15%
Investment Ratios
PE (x) 7.29 PBV (x) 1.11 Div Yield (%) 1.28
Per Share Details as at 31.12.14 (LKR)
Earnings per share (TTM)
2.93
34.31 Net Asset Value per share
215.53
223.74 Dividend per share (TTM) 3.20
Business Nature
Central Finance Company PLC (CFIN) is a Licensed
Finance Company engaged Leasing, Hire Purchase,
Deposit Mobilization, Insurance Broking and other non-
banking financial services.
Shareholder Details
Corporate Services 16%
Mr. E. H. Wijenaike 15% Employees' Provident Fund 11% Shareholders below 5% 52%
Source: CSE, Bloomberg, LOSEC Research
Analyst(s):
Shehan Bartholomeuz
+94 117 880835
Central Finance Company PLC
Initiation Coverage
11 February 2015 | LOLC Securities Research Publication
Recommendation Guidance, Important Disclosures and Analyst Certification: Page 22
Equity Research
Salient Sections of the Report
NBFI sector generates higher yields on aggressive penetration (pg.2) | CFIN stands out on
low cost (pg.4) | CFIN’s robust Interest Spread to drive the top line (pg. 6) | Sound Asset
Quality and Credit Profile (pg.7) | Conservative Approach to reduce Risk Premium (pg.8) |
Strong Franchise and Wide Reach to drive the Business (pg.9) | Nations Trust Bank: A
Sweetener on CFIN’s Value (pg.10) | Valuation (pg.11) | Sensitivity (pg. 12) | Earnings risk
comment (pg. 12) | Appendices (pg.13)
High Yielding Assets, with Unaffected Quality
We expect Sri Lanka’s financial sector to play a pivotal role in economic growth of the
country providing the liquidity to the system. Especially the financial institutions with
exposure to fast growing economic segments such as retail and SME are expected to
outperform in terms of advances growth, albeit with weaker asset quality. CFIN has been
able to attain the best of both worlds with sound asset quality while maintain high
profitability with its exposure to high yielding portfolios.
Investment Considerations
Aggressive penetration of NBFIs: Targeting client bases which are not accessed through
traditional banking channels resulting high profitability is a common feature in Non-
Banking Finance Institute (NBFI) sector. Accordingly, CFIN being a pioneer NBFI in the
country has been able expand fast after the end of civil conflict, and we see CFIN to leverage
on its strong foothold in the financial sector and expect continuous strong performance in
bottom line.
Strong Franchise to market its products: CFIN is one of the oldest finance establishments
in the country and is a household name to finance a vehicle. With its widespread presence
across Sri Lanka, the strong brand name gives it competitive advantage in the NBFI market.
Stable Interest Spread and Top Line Growth: CFIN has been able to maintain high interest
spread over the years even during adverse interest environments. It has been able to keep
funding costs mainly from deposit mobilizations, at lower levels on its higher credit
reputation and franchise name. Furthermore company has been able to continually grow its
high yielding advances portfolios.
Streamlined cost structure to drive the profitability: CFIN has one of the lowest
Efficiency Ratios (Cost to Income) in the industry resulting in strong top line performance to
be reflected in company’s profits.
Sound Asset Quality: CFIN has low NPL ratios compared to the industry and maintain
conservative loan to value ratios with controlled loan book expansion.
Investment into a high yielding bank: CFIN’s associate investment in Nations Trust Bank
PLC (NTB) is a highly profitable venture as NTB is a fast growing mid-size Licensed
Commercial Bank generating high ROEs, contributing significantly to CFIN’s bottom line.
Valuation
We believe Sri Lanka’s financial sector to show robust growth and CFIN to continue to be a
strong player in non-banking sector. We have valued the counter using Residual Income
Valuation model and accordingly counter is trading at discount to our valuation. We give
Buy recommendation for CFIN.
100.00
200.00
300.00
06/02/12 06/02/13 06/02/14 06/02/15
LKR
Price Behaviour
ASI movement (adjusted to CFIN base price) CFIN Share Price
Initiation Coverage: Central Finance Company PLC | 11 February 2015
2 | LOLC Securities Limited
NBFI sector generates higher yields on aggressive penetration Sri Lanka’s financial sector has taken off since the end of civil conflict on the economic optimism. Country’s credit environment has improved significantly with lower interest rates, low inflation rates and higher economic activity resulting in higher demand for credit products. We expect similar growth in mid to short term (3-5 years) in the financial sector with continually improving macroeconomic fundamentals.
Graph 1: Graph 2: Despite fast growth of advances, country remains comparatively under financed compared to peers
During the post war period NBFI (Non-Banking Finance Institutes/Licensed Finance Companies) sector has been able to outperform traditional LCBs in terms of assets growth as NBFIs have been fairly aggressive to tap into credit growth. NBFIs’ business models give them the flexibility to grow their advances portfolios in riskier assets than LCBs and they have been tapping into fast growing economic segments in the low end of spectrum (mid to low income earning population). NBFIs have also generated higher yields on its loan portfolios with its loan portfolios tilted toward high yielding (albeit riskier) assets. For instance, leasing and HP portfolios account to about 67% of NBFI advances.
Graph 3: Breakdown of Advances of NBFI Sector (As at FYE 2013) Furthermore NBFIs’ more relaxed regulatory requirements compared to LCBs on the lending side, give more room for NBFIs to expand its accommodations compared to LCBs.
Source: CBSL Source: CBSL, World Bank data
0
2,000
4,000
6,000
8,000
10,000
12,000
2009 2010 2011 2012 2013
LK
R b
illi
on
s
Financial Sector Assets Lending Institutions Assets
Financial Sector has seen fast growth with lending sector leading the growth
0
20
40
60
80
100
120
140
160
180
200
%
Credit % of GDP
45%
22%
22%
5%
1% 2%
4%
Finance Leasing
Hire Purchase
Other Secured Loans
Pawning Advances
Loans against Real Estate
Loans against Deposits
Other
Lending sector assets have
grown by 17% CAGR
Source: CBSL
Credit Growth of c.15% for
next 5 years
NBFIs’ flexible and
aggressive business models
help them to outperform
banks on lending growth
Initiation Coverage: Central Finance Company PLC | 11 February 2015
3 | LOLC Securities Limited
Graph 4: Graph 5: NBFIs have considerably higher interest margins compared to banks
Despite higher margins, most of the small NBFIs struggle with high funding costs, high operational costs and higher provisioning costs due to poor asset quality. This has resulted in significant volatility in profitability for NBFI sector. Especially these smaller finance companies are more susceptible for external credit environment fluctuations. But larger NBFIs (including CFIN) has more streamlined cost structures with better asset quality and access to low funding options. Therefore large NBFIs have recorded continuously high ROEs, even during adverse credit environments.
Graph 6: Volatile profitability of NBFI Sector Graph 7: Large NBFIs outperform the sector profitability
Source: CBSL Source: CBSL
0
1,000
2,000
3,000
4,000
5,000
6,000
0
100
200
300
400
500
600
700
800
2009 2010 2011 2012 2013
LC
B (
LK
R b
illi
on
s)
NB
FI
(LK
R b
illi
on
s)
NBFI Assets LCB Assets
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
2009 2010 2011 2012 2013
%
Banking Sector NIM NBFI NIM
Source: CBSL Source: Bloomberg, CBSL
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
2009 2010 2011 2012 2013
%
Banking Sector ROE NBFI ROE
-5.0
0.0
5.0
10.0
15.0
20.0
25.0
30.0
35.0
40.0
45.0
2009 2010 2011 2012 2013
%
NBFI ROE Leading NBFIs ROE
NBFIs have shown stronger growth than traditional
banks
NBFI CAGR of 24.6%
+310bps
But with higher cost
structure…
…yet larger NBFIs have
more streamlined cost
structure
Initiation Coverage: Central Finance Company PLC | 11 February 2015
4 | LOLC Securities Limited
CFIN stands out on low cost Whilst large NBFIs generally have lower cost base compared to their smaller counterparts, CFIN has even more streamlined cost structure compared to other large NBFIs. Deposits are the major source of funding in Sri Lankan financial institutions with deposits accounting to 70% and 47% of total funding of banking sector and NBFI sector respectively. Larger NBFIs with stronger franchise and sound credit reputation have been able mobilize deposits more aggressively accounting for higher proportion of funding. Similarly CFIN has higher portion of deposits as a percentage of total funding. Its total cost of funding also has been comparatively low with cheaper deposit financing compared to peers on CFIN’s stronger franchise.
Graph 8: CFIN’s funding is dependent on deposits Graph 9: CFIN has comparatively low funding cost
CFIN also has a well streamlined cost structure comparison to the top line revenue it generates. CFIN has continued its expansion across the country in past few years, but at the same time it has adopted low cost operational models putting less pressure on the bottom line. It has also adopted a strategy of setting up secondary branches (micro branches) which have lower cost base with back office functions are centralized. As of 31.03.2014, 28% (24) of branches consisted of micro branches.
Graph 10: Lower Cost to Income Ratio
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10
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30
40
50
60
70
80
CFIN LOFC LFIN PLC CLC COCR
%
Cost to Income Average
Source: Annual Reports, LOLC SEC Research Source: Annual Reports, LOLC SEC Research
Source: Bloomberg, LOLC SEC Research
0%
20%
40%
60%
80%
100%
120%
CFIN LOFC LFIN PLC CLC COCR
Deposits % of Total Funding Average
10%
11%
11%
12%
12%
13%
13%
14%
14%
15%
CFIN LOFC LFIN PLC CLC COCR
Average Cost of Funding Average
Access to cheaper deposit
financing gives lower
funding cost for CFIN
Operational cost also low
compared to peers
Initiation Coverage: Central Finance Company PLC | 11 February 2015
5 | LOLC Securities Limited
NBFIs generally have higher cost base compared to banks with higher funding costs (banks have access to cheaper finance including access for zero interest demand deposits) and higher operational costs (aggressive market penetration of NBFIs result in higher operational costs). Higher cost structure is generally compensated by high interest income earned by the NBFIs but it makes it vulnerable external credit environment. i.e. adverse environment can weigh on the bottom line. Comparatively CFIN’s streamlined cost structure helps the company to steer through adverse market environments, which is reflected by CFIN’s stable ROE levels over the years.
Graph 11: Shift towards lower operational cost model Graph 12: Stable ROE despite industry fluctuations
Source: Annual Reports, Bloomberg, LOLC SEC Research Source: Annual Reports, CBSL, Bloomberg, LOLC SEC Research
0
10
20
30
40
50
60
70
2008 2009 2010 2011 2012 2013 2014
%
Cost to Income Ratio
-5
0
5
10
15
20
25
30
35
40
2010 2011 2012 2013 2014
%
CFIN ROE Industry ROE
Lower cost structure
resulting in less volatility in
profitability
Initiation Coverage: Central Finance Company PLC | 11 February 2015
6 | LOLC Securities Limited
CFIN’s robust Interest Spread to drive the top line CFIN has been able to increase its interest spread over the years with low cost funding (See pg. 4) and high yielding assets. CFIN asset portfolio is significantly tilted towards high yielding commercial vehicle financing portfolios such as construction vehicles (trucks, tippers, lorries), delivery vans and three wheelers. CFIN has strong competitive advantage in the market in this segment. More established LCBs are reluctant to operate in this segment due to lower risk appetite of the LCBs (but CFIN does maintain strong asset quality (See pg. 7)) whilst other NBFI generally do not possess the brand franchise and the reach (See pg. 9).
Graph 13: Interest Spread has increased
NBFIs in Sri Lanka generally have significant asset liability maturity mismatches with long term asset portfolios being funded by short term liabilities (mainly short tenure deposits). This is a main reason for higher interest spreads in the sector, but it also exposes it to interest rate risk. CFIN is also susceptible to maturity mismatch, but in recent times it has been curtailed down, increasing its exposure to longer term borrowings. Furthermore company also has sufficient unutilized credit lines to fund its maturity mismatches (Source: Fitch Lanka).
Graph 14: Difference of Asset Proportion and Liability Proportion under three maturity categories
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
2008 2009 2010 2011 2012 2013 2014
Interest Spread Average Cost of Funding Earning Yield
Source: Annual Reports, Bloomberg, LOLC SEC Research
Source: Annual Reports, LOLC SEC Research
-50%
-40%
-30%
-20%
-10%
0%
10%
20%
30%
< 12 months 1 to 3 years > 3 years2013
2014
High Asset Liability mismatch in short term
with large short term deposit base (liability)
Higher proportion of assets in longer
maturities with less long term liabilities
Interest spread has widened
over the years
Significant Asset Liability
Mismatch
Initiation Coverage: Central Finance Company PLC | 11 February 2015
7 | LOLC Securities Limited
Sound Asset Quality and Credit Profile CFIN’s lending portfolio contributes to about 74% of total assets and the lending portfolio is mainly consisting of commercial vehicles to individuals in the SME sector. HP and Lease portfolio accounts to more than 90% of lending portfolio. Company also have substantial operating lease / vehicle hire business which contributes to about 5% of revenue and 2% of Total Assets. Accordingly company has significant exposure to vehicle financing, increasing risk of exposure to single asset class. But the CFIN maintains a conservative loan to value ratios around 70-80% in its vehicle advances strengthening the collateral backed asset quality. The country’s legal framework allows lessor to foreclose on non-performing assets with recourse to the judicial system mitigating credit risk of HP and lease portfolios. Furthermore CFIN is fairly stringent in its loan evaluation process and comparatively conservative in loan book expansion resulting in stronger asset quality. Accordingly CFIN has low NPLs compared to sector. Graph 15: Gross NPL Ratios of the peers
CFIN has fairly dispersed loan portfolio with top 20 portfolios accounts to 3.3% of advances. Furthermore 88% of loan contracts are for loans under LKR 1 million, reflecting granular business model of the company (Source: Fitch Ratings). CFIN has a A+(lka) credit rating assigned by Fitch Ratings Lanka. Graph 16: Credit Rating
0%
1%
2%
3%
4%
5%
6%
7%
8%
CFIN LOFC LFIN PLC CLC COCR
Gross NPL Industry GNPL (as at August 2014)
Source: Interim Financials, CBSL
Source: Fitch, ICRA, Lanka Rating
0
1
2
3
4
5
6
7
8
9
CFIN LOFC LFIN PLC CLC COCR
Credit Rating Score
Credit Ratings Score
We have given credit score based on below guideline AAA 11 AA+ 10 AA 9 AA- 8 A+ 7 A 6 A- 5 BBB+ 4 BBB 3 BBB- 2 BB+ 1
Stringent loan evaluation
process and conservative
loan to value resulting in
sound asset quality despite
high exposure in riskier
assets.
Investment grade credit
rating
Initiation Coverage: Central Finance Company PLC | 11 February 2015
8 | LOLC Securities Limited
Conservative Approach to reduce Risk Premium
Despite strong franchise and fast branch expansion CFIN has been fairly conservative in loan disbursement. Therefore its assets growth has lagged the other leading NBFIs.
Graph 17: Assets Growth Comparison
CFIN’s conservative growth is also reflected by its comfortable capital adequacy levels. CFIN has significantly high CARs compared to peers. High capital adequacy gives CFIN room for capital expansion without altering the credit profile of the company significantly.
Graph 18: Sound capital adequacy
Source: Bloomberg
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70
80
0
10
20
30
40
50
60
70
80
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100
CFIN LOFC LFIN PLC COCR
% %
Total Assets Growth - 5 years (annualised) Total Equity Growth - 5 years (annualised)
Source: Bloomberg
0.00%
5.00%
10.00%
15.00%
20.00%
25.00%
30.00%
CFIN LOFC LFIN PLC COCR
Core Capital Ratio Total Capital Ratio
Moderate growth
High capital adequacy
Initiation Coverage: Central Finance Company PLC | 11 February 2015
9 | LOLC Securities Limited
Strong Franchise and Wide Reach to drive the Business CFIN being the second oldest finance company has built a strong franchise during its operations over five decades. It is the second largest NBFI in terms of Asset base and is a house hold name in Sri Lanka for vehicle financing. CFIN’s brand is ranked 30th most valuable corporate brand in Sri Lanka by Brand Finance and is the second most valuable brand (after PLC) among the NBFIs. Strong franchise helps CFIN to attract business as well as mobilize deposits at cheaper interest rates compared to competitors.
Table 1: Brand Franchises of NBFIs in Sri Lanka Graph 19: Well distributed branch network of CFIN
Company Brand Value (USD mns)
Brand Rating
PLC 34 AA-
CFIN 16 A
LFIN 14 A
TFC 8 BBB
COCR 5 A
VFIN 4 A-
SFCL 3 BB
CRL 2 BB
SFIN 2 BB
Source: Brand Finance Source: CFIN Annual Report 2013/2014
26
7
4
7
12
8
8
8
6
No. of branches are indicated in each province
Initiation Coverage: Central Finance Company PLC | 11 February 2015
10 | LOLC Securities Limited
Nations Trust Bank: A Sweetener on CFIN’s Value CFIN has made a strategic investment in to Nations Trust Bank PLC owning 20% of the Licensed Commercial Bank. NTB has been one of the fastest growing mid-size LCB in Sri Lanka and it is also one of most profitable banks in the country. NTB’s high profitability is mainly driven by strong presence in credit card business with American Express franchise and high yielding advances such as leasing products. NTB mainly operates in retail and SME sectors and increasingly looking forward to diversifying into corporate loans.
Graph 20: NTB has superior profitability Graph 21: NTB has grown significantly over the years
Despite strong profitability and rapid growth NTB has maintained sound asset quality with diversified portfolio of advances and sound NPL levels.
Graph 22: Diverse portfolio with exposure to high yields Graph 23: NPLs below the average
We expect NTB to continue with the growth momentum supported with branch expansion and fast credit growth. CFIN carries NTB in its book at LKR 2.1 billion. NTB will continue to generate superior return on assets for CFIN and will add a significant value to CFIN.
Source: LOSEC Research, Bloomberg Source: Bloomberg
-
1
2
3
4
5
6
7
-5
0
5
10
15
20
25
COMB NTB NDB SEYB HNB SAMP UBC PABC
% %
ROE NIM
0
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40,000
60,000
80,000
100,000
120,000
140,000
160,000
2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013LK
R m
illio
ns
Total Assets Customer Deposits
Source: NTB Interim Financials Source: Interim Financials, CBSL
18.9%
26.7%
26.7%
12.4%
1.9%
1.5%
11.9%
Overdrafts
Term Loans
Leases
Credit Cards
Corporate DebtSecurities
Housing Loans
Other Advances 0%
2%
4%
6%
8%
10%
12%
14%
COMB NTB NDB SEYB HNB SAMP UBC PABC
Gross NPL Sector GNPL (August 2014)
Total Assets CAGR = 22.4% Customer Deposits CAGR = 30.7%
NTB is a fast growing bank
with high profitability
NTB’s growth to continue,
adding value to CFIN
Initiation Coverage: Central Finance Company PLC | 11 February 2015
11 | LOLC Securities Limited
Valuation We have used Residual Income valuation in deriving the valuation for CFIN. Accordingly we estimate total valuation for the company at LKR 33.9 billion. CFIN’s current book value (as at 30.09.2014) stands at LKR 22.6 billion and we estimate additional 50% value to be generated from value drivers we have discussed above. The market (CSE) has priced the company at LKR 26.0 billion which is still at a 23% discount for LOLC SEC valuation. We have taken Cost of Equity at 13% which is 6% premium to 3 year Sri Lanka Govt Treasury Bond Yield. Sensitivity of valuation for Terminal Growth and Cost of Equity is indicated below and sensitivity of key underlying assumptions are evaluated separately in proceeding section. Table 02: Valuation Sensitivity Matrix NTB Investment’s impact on valuation CFIN’s 20% stake in NTB has a material impact on overall CFIN’s valuation. Breakup of CFIN’s Valuation Value Per Share Value Proportion CFIN’s Valuation excluding NTB 28,714 274 83% NTB Valuation attributable to CFIN 5,853 56 17% CFIN Final Valuation 34,567 330 100% NTB’s valuation attributable to CFIN valuation is estimated using Residual Income Valuation model. (Cost of Equity - 13%. Terminal Growth – 5%) Table 03: Peer (including Regional) Comparison
Name Market Cap (USD Mn) PE Ratio PBV ratio Dividend Yield ROE
Central Finance Co PLC 195.8 7.5 1.2 1.3 17.0
LB Finance PLC 83.4 5.3 1.5 4.1 32.0
People's Leasing & Finance PLC 297.3 10.2 1.9 5.0 19.4
Commercial Credit & Fin PLC 109.9 8.0 3.1 1.1 55.1
Srei Infrastructure Finance (India) 344.9 15.4 0.6 1.2 4.0
Kyushu Leasing Service Co (Japan) 86.3 5.8 0.5 1.9 8.8
Muthoot Finance Ltd (India) 1,377.5 10.2 1.9 1.9 19.5
Potential Impact on ‘Super Gains’ Tax In recent interim budget presentation government proposed a one off new tax termed ‘Super Gains Tax’ of 25% on profits for companies which made more than LKR 2 billion profit on FY 2013/14. The proposal remains ambiguous but CFIN will most probably fall under the taxable category. For FY 2013/14 CFIN (at company level) has made PBT of LKR 3,707 million and if proposal goes through CFIN can be liable for new tax of LKR 927 million (Assuming taxed at PBT level). The impact would be valuation per share coming down to LKR 322 (-LKR 8), remaining as a BUY.
Share price in LKR
Cost of Equity
11% 12% 13% 14% 15%
Ter
min
al G
row
th
Rat
e
3% 335 323 314 307 300
4% 347 332 321 312 305
5% 363 344 330 319 310
6% 385 359 341 328 317
7% 418 381 356 339 325
Source: LOSEC Research
Source: LOSEC Research, Bloomberg
If CFIN becomes liable for
one off ‘Super Gains Tax’ the
cash outflow will result in
valuation to curtail down by
LKR 8 to LKR 322.
Initiation Coverage: Central Finance Company PLC | 11 February 2015
12 | LOLC Securities Limited
Summarized Sensitivity of Assumptions
Graph 24: Private Credit Growth: Medium Graph 25: Average Deposit Rate: High
Graph 26: Average Lending Rate: High Graph 27: Tax Rate: Medium
Earnings Risk Comment CFIN’s valuation is heavily dependent on overall credit growth of the economy and NBFI’s ability to maintain higher interest rate spread over the years. We have assumed a fast credit growth at tune of double digit growth in short term and high single digit in long term. Our optimistic credit growth forecasts are based on strong economic growth outlook of the country and comparatively low credit penetration of the economy. The main risk for revenue estimates of CFIN stems from the uncertainty of credit markets. Financial markets have tendency to move zigzag with good periods followed by rapid crashes which can be followed by lackluster periods. We have seen similar cases in recent times with Global Financial Crisis, European crisis, and the slowing credit growth witnessed by Sri Lanka from 2012 to mid-2014. These scenarios can affect the lending institutions badly with stagnant loan books, and particularly for the institutes with weak asset quality will suffer most during adverse credit environments. But on a positive note CFIN’s performance was not much affected by slowing credit growth of the country during 2012 to mid-2014 due to sound asset portfolio and leaned cost structure of CFIN. Nevertheless CFIN is susceptible to negative credit environments in the country which can impact the earnings of the company. In terms of interest spread there is a risk of reducing spread in the long term with reducing market interest rates and lowering market spreads. The banks entering the high yield business segments where NBFIs operate in also can reduce the yield. But the risk is mitigated with NBFIs business models of aggressive selling channels at grass root levels and more relaxed regulatory requirements compared to LCBs making entry difficult for LCBs. From the cost drivers side the main risk comes from inflationary pressures of the economy but finance sector is relatively less affected compared to other resource dependent industries.
Source: LOSEC Research Source: LOSEC Research
Source: LOSEC Research Source: LOSEC Research
+2%
-2%
250
260
270
280
290
300
310
320
330
340
350
-1% 0 1%
Val
uat
ion
(L
KR
/Sh
are)
Change of Private Credit Growth Forecast
250
270
290
310
330
350
370
390
-1% 0 1%
Val
uat
ion
(L
KR
/Sh
are)
Change of Average Deposit Rate Forecast
250
270
290
310
330
350
370
390
-1% 0 1%
Val
uat
ion
(L
KR
/Sh
are)
Change of Average Lending Rate Forecast
250
260
270
280
290
300
310
320
330
340
-1% 0 1%
Val
uat
ion
(L
KR
/Sh
are)
Change of Tax Rate Forecast
+4% -4%
-13%
+13%
+17%
-17%
+4%
-4%
The main risk for CFIN
stems from the changes in
credit environment
Initiation Coverage: Central Finance Company PLC | 11 February 2015
13 | LOLC Securities Limited
0
500,000
1,000,000
1,500,000
2,000,000
2,500,000
3,000,000
0
50
100
150
200
250
300
LK
R
Volume
Price
50 Day Moving Average
100 Day Moving Average
0
10
20
30
40
50
60
70
80
90
100
09/09/11 12/09/11 03/09/12 06/09/12 09/09/12 12/09/12 03/09/13 06/09/13 09/09/13 12/09/13 03/09/14 06/09/14 09/09/14 12/09/14
RSI (14)
Appendices Table 04: Price Return (Annualized)
Graph 28: Share Price Movement
CFIN ASI Index S&P SL 20 Index PLC
3 months 3.63 -10.22 -22.11 57.96
6 months 21.71 9.88 5.45 104.08
1 year 32.44 19.28 17.12 74.91
3 year 12.19 11.09 10.66 28.31
Source: Bloomberg
Source: Bloomberg
Highest Price as at 12.09.2011: LKR.278.40
Lowest Price as at 28.05.2012: LKR 129.40
Initiation Coverage: Central Finance Company PLC | 11 February 2015
14 | LOLC Securities Limited
Graph 29: CFIN PE Ratio behavior Graph 30: CFIN PBV ratio behavior
Graph 31: CFIN price to sales ratio Graph 32: CFIN DPS and Dividend Yield
Graph 33: All Share Index PE ratio Graph 34: All Share Index PBV ratio
Source: Bloomberg Source: Bloomberg
Source: Bloomberg Source: Bloomberg
Source: Bloomberg Source: Bloomberg
2.8
1.74
1.34
1.26
1.14
1.02
14.75
12.69
9.95
5.00
5.50
6.00
6.50
7.00
7.50
8.00
8.50
28/03/13 28/09/13 28/03/14 28/09/14
PE Highest Average Lowest
8.20
0.80
0.85
0.90
0.95
1.00
1.05
1.10
1.15
1.20
1.25
1.30
28/03/13 28/09/13 28/03/14 28/09/14
PBV Highest Average Lowest
1.20
1.30
1.40
1.50
1.60
1.70
1.80
1.90
2.00
2.10
28/03/13 28/09/13 28/03/14 28/09/14
Price to Sales Highest Average Lowest
9.00
10.00
11.00
12.00
13.00
14.00
15.00
16.00
04/04/13 04/10/13 04/04/14 04/10/14
PE Highest Average Lowest
1.00
1.20
1.40
1.60
1.80
2.00
2.20
04/04/13 04/10/13 04/04/14 04/10/14
PBV Highest Average Lowest
0.0%
0.5%
1.0%
1.5%
2.0%
2.5%
3.0%
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
2008 2009 2010 2011 2012 2013 2014
Div
ide
nd
Yie
ld
DP
S(L
KR
)
DPS Dividend Yield
6.57
5.77 0.90
1.08
1.26
1.45
1.67
2.04
14.72
13.27
14.44
2.03
1.73
1.52
Initiation Coverage: Central Finance Company PLC | 11 February 2015
15 | LOLC Securities Limited
Table 05: Forecast Financial Statements
Figures in LKR Mn FY 2011/12 FY 2012/13 FY 2013/14 FY 2014/15 (E) FY 2015/16 (F) FY 2016/17 (F) Income Statement Interest Income 7,510 9,772 11,926 11,982 12,926 15,069
Interest Expenses 2,663 4,069 4,730 4,600 4,639 5,373
Net Interest Income 4,847 5,703 7,196 7,382 8,286 9,696
Non-Interest Income 1,466 1,369 1,426 1,355 1,288 1,224
Net Revenue 6,313 7,073 8,622 8,737 9,574 10,920
Provisions for Loan Losses -88 201 1,214 462 533 622
Net Revenue After Provisions 6,401 6,871 7,408 8,275 9,041 10,298
Non-Interest Expense 2,600 2,823 3,578 3,910 4,272 4,668
Operating Income 3,801 4,049 3,830 4,365 4,768 5,629
- Income from Associates 495 616 699 782 874 978
- Net Non-Operating Gains -4 -45 57 58 60 61
PBT 4,292 4,620 4,587 5,206 5,702 6,668
Tax Provision 1,232 1,335 1,232 1,466 1,606 1,877
PAT 3,060 3,285 3,354 3,740 4,097 4,790
Minority Interests 95 68 63 85 93 109
Net Profit 2,965 3,217 3,291 3,655 4,004 4,681
Balance Sheet
Cash & Near Cash Items 356 689 571 458 471 456
Short-Term Investments 1,744 913 1,540 1,346 1,570 1,830
+ Accounts & Notes Receivable 1,208 813 919 1,021 970 922
Net Loans 38,154 44,318 48,342 55,831 65,097 75,902
Long-Term Investments 1,694 2,264 3,429 3,843 4,472 5,205
+investment in associates 3,746 4,047 5,467 5,795 6,143 6,512
Net Fixed Assets 2,011 2,365 2,719 3,116 3,571 4,092
Other Assets 885 1,148 2,443 1,623 1,870 2,157
Total Assets 49,798 56,557 65,430 73,032 84,164 97,076
Customer Deposits 22,795 26,985 32,673 33,498 39,058 45,541
+ Other Borrowings 8,000 7,627 6,409 9,014 10,185 11,496
+ Other Short-Term Liabilities 2,310 1,891 1,620 1,695 1,774 1,856
+ Other Long-Term Liabilities 2,170 2,533 3,010 3,150 3,297 3,450
Total Liabilities 35,276 39,036 43,712 47,358 54,314 62,344
+ Minority Interest 614 631 732 1,033 1,205 1,406
+ Share Capital & APIC 568 568 568 568 568 568
+ Retained Earnings & Other Equity 13,339 16,322 20,417 24,072 28,077 32,757
Total Equity 14,522 17,521 21,717 25,674 29,850 34,732
Total Liabilities & Equity 49,798 56,557 65,430 73,032 84,164 97,076
Source: Bloomberg and LOSEC Research
Initiation Coverage: Central Finance Company PLC | 11 February 2015
16 | LOLC Securities Limited
Table 06: Forecast Ratios Statements
Finance Ratios
Return on Assets 6.5% 6.0% 5.4% 5.3% 5.1% 5.2%
Return on Common Equity 23.9% 20.9% 17.4% 16.0% 15.0% 15.1%
Cost to Income Ratio 41.2% 39.9% 41.5% 44.8% 44.6% 42.8%
Net Interest Spread 10.2% 9.2% 10.9% 9.3% 9.2% 9.2%
Common Equity/Total Assets 27.9% 29.9% 32.1% 33.7% 34.0% 34.3%
Prov Loan Losses/Total Loans -0.2% 0.5% 2.5% 0.8% 0.8% 0.8%
Total Loans/Total Deposits 167.4% 164.2% 148.0% 166.7% 166.7% 166.7%
Total Loans/Total Assets 76.6% 78.4% 73.9% 76.4% 77.3% 78.2%
Deposits/Assets 45.8% 47.7% 49.9% 45.9% 46.4% 46.9%
Earning Assets/Int Bearing Liabilities 120.4% 124.6% 135.0% 145.4% 129.4% 134.6%
Growth Ratios
Interest Income Growth 19.5% 30.1% 22.0% 0.5% 7.9% 16.6%
Interest Expense Growth 13.1% 52.8% 16.3% -2.7% 0.8% 15.8%
Net Interest Income Growth 23.4% 17.7% 26.2% 2.6% 12.3% 17.0%
Net Revenue Growth 13.5% 12.0% 21.9% 1.3% 9.6% 14.1%
Net Inc Growth 62.3% 8.5% 2.3% 11.1% 9.6% 16.9%
Earning Assets Growth 26.9% 16.9% 11.1% 15.3% 16.6% 16.6%
Assets Growth 21.0% 13.6% 15.7% 11.6% 15.2% 15.3%
Net Worth Growth 27.6% 21.4% 24.2% 17.4% 16.3% 16.3%
Net Loan Growth 33.1% 16.2% 9.1% 15.5% 16.6% 16.6%
Deposit Growth 21.5% 18.4% 21.1% 2.5% 16.6% 16.6%
Earnings per share (LKR) 28.3 30.7 31.4 34.8 38.2 44.6
Book Value per share (LKR) 132.6 161.0 200.1 234.9 273.1 317.7
Source: Bloomberg and LOSEC Research
Initiation Coverage: Central Finance Company PLC | 11 February 2015
17 | LOLC Securities Limited
Company Central Finance Company PLC is a Non-Banking Finance Institute registered as a Licensed Finance Company under Central Bank of Sri Lanka categorization. CFIN operates in Sri Lanka having a widespread branch network across the country. CFIN’s primary operation is to provide wide range of financial services including leasing and hire purchases, deposit mobilization, loan disbursement, Micro & financing. Furthermore it has other business interests through subsidiaries and associate investment, but CFIN financial performance is dominated by its NBFI operations. Subsidiaries Company Line of Business % Holding Central Industries PLC Manufacture and distribution of PVC pipes
and fittings 50%
Central Mineral Industries (Pvt) Ltd. Manufacture of mineral products 100% Central Construction and Development (Pvt) Ltd.
Investment company 100%
Expanded Plastic Products (Pvt) Ltd. Investment company 100% Central Homes (Pvt) Ltd. Property development and sale of real estate 100% Mark Marine Services (Pvt) Ltd. Hydro power generation 58% Central Developments Ltd. Investment company 100% CF Insurance Brokers (Pvt) Ltd. Insurance broking 100% Central Transport and Travels Ltd. Hiring of vehicles 100% Hedges Court Residencies (Pvt) Ltd. Construction and sale of apartments 100% Dehigama Hotels Company Ltd. Renting of commercial property 80% CF Growth Fund Ltd. Investment company 100% Kandy Private Hospitals Ltd. Provision of healthcare services 67% Associates Company Line of Business % Holding Nations Trust Bank PLC Licensed commercial bank 20% Tea Smallholder Factories PLC Manufacture and sale of black tea 29% Capital Suisse Asia Ltd. Investment company 25%
Central Industries PLC Central Industries manufactures and markets a range of materials and products for water supply and drainage systems, electrical products and distribution of power tools. Its product portfolio consists of “National PVC’ one of the leading brands of PVC pipes. The Company also pioneered the production of stainless steel water tanks in Sri Lanka. Its electrical product portfolio marketed under ‘Krypton’ brand. CF Insurance Brokers (Pvt) Ltd. CF Insurance brokers provide insurance broker services primarily operating in general insurance segment with limited presence in life insurance. CFIB has 14.0% market share in general insurance business and 13.8% market share in total insurance (based on commission earned). Mark Marine Services (Pvt) Ltd. Mark Marine Services is a power plant operator, operating 2.5MW hydro power plant. Kandy Private Hospitals Ltd Kandy Private Hospitals operates a One of the premier hospitals in Kandy. Nations Trust Bank PLC Nations Trust Bank is a mid-size Licensed Commercial Bank in Sri Lanka providing range of banking services.
Initiation Coverage: Central Finance Company PLC | 11 February 2015
18 | LOLC Securities Limited
Capital Suisse Asia Ltd. Capital Suisse Asia Ltd was established as a Joint Venture with B.P de Silva Holdings (Pvt) Ltd in Singapore. Capital Suisse Asia is the holding company of Zyrex Power Ltd and High Tech Power Systems (Pvt) Ltd, which operate 3 Hydro Power plants with an installed capacity of 4.1 Mw. An environmentally friendly operation carried out with the least impact on nature, the power plants generate employment opportunities while supplementing power to the national grid. Tea Smallholder Factories PLC The company is involved in purchasing and processing tea and specialized in the manufacture of orthodox and CTC low grown teas, with many of the marks consistently achieving record prices.
Shareholder Number of Shares % Stake
1 Corporate Services (Pvt) Ltd. 16,895,461 16.11%
2 E. H. Wijenaike 16,164,123 15.41%
3 Employees' Provident Fund 11,109,455 10.59%
4 Thurstan Investments Limited 6,032,701 5.75%
5 Perpetual Capital (Pvt) Ltd. 4,819,592 4.60%
6 A.J. Wijenaike 3,271,357 3.12%
7 N.W. Wijegoonawardene 2,162,353 2.06%
8 G.S.N. Peiris 1,828,168 1.74%
9 B.P.De Silva Holdings (Pte) Ltd. 1,752,900 1.67%
10 C.R. Dunuwille 1,348,582 1.29%
11 N.M. Gunawardena 1,300,346 1.24%
12 J.B. Cocoshell (Pvt) Ltd. 1,278,379 1.22%
13 P.R. Munasinha 1,226,980 1.17%
14 Employees' Trust Fund Board 1,183,847 1.13%
15 P.M. Wijenaike 1,016,180 0.97%
16 R.E. Rambukwelle 984,906 0.94%
17 C. Kiriella 967,881 0.92%
18 The Ceylon Investment PLC 915,969 0.87%
19 S.K. Wedande 852,329 0.81%
20 A.K. Gunaratne 835,274 0.80%
Others 28,936,550 27.59%
Total 104,883,333 100.00%
Graph 35: Shareholder Structure 1 Graph 36: Shareholder Structure 2
Source: Bloomberg Source: Bloomberg
Individuals 52%
Institutions 48%
Foreign 12%
Local 88%
Initiation Coverage: Central Finance Company PLC | 11 February 2015
19 | LOLC Securities Limited
Key Management (Source: Company Annual Report 2013/14) Eranjith Harendra Wijenaike / Managing Director Eranjith Wijenaike is a Director of several companies within and outside the group including Tea Smallholder Factories PLC, Trans Asia Hotels PLC, Equity One PLC and Central Industries PLC. He served as a founder Director of Nations Trust Bank PLC for a period of 12 years and retired in December 2011. He has over 30 years of experience and holds a Bachelor’s Degree in Commerce and a Postgraduate Diploma in Finance and Management. He is a Member of the Chartered Institute of Management (UK). Gerard Shamil Niranjan Peiris / Director (Finance) Shamil Peiris serves on the Boards of many companies within and outside the group. He possesses over 36 years of post -qualification experience. He is a Fellow of the Institute of Chartered Accountants of Sri Lanka, Institute of Credit Management & Society of Certified Management Accountants – Sri Lanka, Chartered Institute of Management Accountants, British Institute of Management and Association of Corporate Treasurers - UK. He is also a Chartered Global Management Accountant. Ravindra Erle Rambukwelle / Director (Marketing and Operations) Ravi Rambukwelle possesses over 35 years of management experience, both locally and internationally. He holds a Bachelor’s Degree in Economics and Political Science from the University of Peradeniya, a Diploma in Marketing from the Chartered Institute of Marketing UK and a Diploma in Commerce from the Institute of Commerce UK. He serves as a Director in several group companies including Tea Smallholder Factories PLC and Central Industries PLC. Arjuna Kapila Gunaratne / Director (Group Coordination) Arjuna Gunaratne oversees the functions of Strategic Planning and Risk Management of the company. He is a Fellow of the Institute of Chartered Accountants of Sri Lanka and the Chartered Institute of Management Accountants of UK. He is also a Chartered Global Management Accountant. He was a Board member of Nations Trust Bank PLC and served as Chairman from 1st November 2012 to 30th April 2014. He also serves on the Board of Central Industries PLC. Dhammika Prasanna de Silva / Director (Credit) Prasanna de Silva a member of the Board of Directors since 1st July 2011. He has served as the Chairman of the Leasing Association of Sri Lanka from 2007 to 2009. At present, he is an advisor to the Association. He also serves as a Member of the Telecommunications Regulatory Commission of Sri Lanka and a director of Nations Trust Bank PLC. He is a Fellow of the Chartered Institute of Management Accountants (UK) and has also completed all examinations of Chartered Financial Analyst (CFA) programme. History CFIN was founded by Mr. Chandra Wijenaike in 1957 as a private limited liability company, Central Finance Company commenced operations by providing financial services in the form of hire purchase facilities to the passenger transport and goods haulage targeting the Central region of the country. It has branched out of central region since then becoming one of the oldest and well established financial entities in the country offering wide range of financial services including Asset Leasing, Savings and Deposits, Contract Hire, Fleet Management, Micro Finance and SME lending. In 1969 the company was converted to a public company with a quotation from the Colombo Brokers Association and remains one of the oldest listed corporations in Colombo Stock Exchange. In 1999 a strategic partnership between John Keells Holdings and Central Finance to acquire the Colombo Branch of Overseas Trust Bank led to the establishment of Nations Trust Bank Plc, which has become one of the leading midsize LCBs in the country. CFIN has also diversified in to non-financial segments including manufacturing of PVC products, healthcare, power, real estate and tea manufacturing. CFIN also has an insurance brokering operation which it pioneered in 1986 and currently has the highest market share in terms of commission earned.
Initiation Coverage: Central Finance Company PLC | 11 February 2015
20 | LOLC Securities Limited
Non-Banking Finance (NBFI) Sector In Sri Lanka financial sector is dominated by Licensed Commercial Banks accounting to half of financial sector assets. LCBs are wide spread across the country but are fairly conservative in its product disbursement with regulatory restrictions and higher asset quality compared to more aggressive NBFIs. NBFIs, even though accounts to small portion of financial sector assets, plays a significant role in the financial sector of the country providing financial products to the clients who may not have access to traditional banking products.
Graph 37: Financial Sector Asset Breakdown
Currently there are 47 NBFIs in the country (As at October 2014), but the number will reduce significantly with the ongoing financial sector consolidation process which started in January 2014. CBSL has identified the systematic risk of having too many small NBFIs and has given guidelines to increase the minimum core capital of NBFIs to LKR 1.5 billion. As of January 2014 only 19 companies had core capital more than LKR 1 billion, which gives an indication on reduction of number of NBFIs in the country with the financial sector consolidation plan. Despite existence of several finance companies, the sector is dominated by large players with largest 6 NBFIs account to about half of total assets of the NBFI sector. These large NBFIs has grown rapid in last few years promoting high yielding products such a leasing and hire purchase, becoming large corporate entities. The asset quality of these large players also has improved significantly and most of these companies have investment grade credit ratings. But contrastingly smaller finance companies have weaker asset quality making them vulnerable to credit environment of the country. Funding of NBFIs mainly dependent on customer deposits and deposits accounts to 47% of total liabilities of NBFIs (as at 31st December 2013). Deposits are mainly consisted of high cost time deposits making cost of funds comparatively high for NBFIs. But large NBFIs with strong franchise and credit profile have been able to attract deposits at significantly low interest rates. Selected Indicators of Non-Banking Finance Sector (As at end Aug 2014) Indicator Value Total Assets (LKR billion) 781.1 Loans & Advances (LKR billion) 594.2 Deposits (LKR billion) 397.4 Borrowings (LKR billion) 177.6 Tier 1 Capital Adequacy Ratio (%) 13.7 Total Capital Adequacy Ratio (%) 14.5 Gross NPA (%) 7.6 ROA (Before Tax) (%) - Annualised 2.5 ROE (After Tax) (%) - Annualised 10.2 Liquid Assets to Total Assets (%) 9.4 *Company Overview, Industry, Key Management, History are taken from the extracts of Website, Annual Reports Central Bank of Sri Lanka and LOSEC Research materials
12.10%
48.70% 8.90%
6.30%
12.60%
3.50% 7.90%
Central Bank
Licensed Commercial Banks
Licensed Specialised Banks
Licensed Finance Companies
Employees’ Provident Fund
Insurance Companies
Other
Source: CBSL
Initiation Coverage: Central Finance Company PLC | 11 February 2015
21 | LOLC Securities Limited
SWOT Analysis Strengths - Strong Franchise, well known across the country - Island wide branch network to deliver the products - Sound credit outlook, Investment grade credit rating - Robust asset quality - Convenient access for funding Weaknesses - Less diverse asset portfolio with heavy reliance on Leasing and HP products - Dependence on deposit financing - Asset liability maturity mismatch. Opportunities - Increased per capita income will give avenues for new product innovations - Economy’s transition to low interest environment can drive the credit growth - Financial sector consolidation program can result in opportunities for inorganic growth Threats - New players (especially banks) entering into CFIN’s main business segments - Rising competition of existing players - Financial/Credit market crashes
Initiation Coverage: Central Finance Company PLC | 11 February 2015
22 | LOLC Securities Limited
Recommendation Guidance
BUY – expected return > 10% in excess of benchmark return
SELL – expected return less than benchmark return
HOLD – expected return between 0% and 10% in excess of benchmark return
Investment Horizon: 3 years
Benchmark Interest Rate: Average Weighted Fixed Deposit Rate (AWFDR) published by Central Bank of Sri Lanka.
Risk Level Evaluation
High: Maximum price volatility to be up or down more than 50% monthly
Medium: Maximum price volatility to be up or down between 25% - 50% monthly.
Low: Maximum price volatility to be up or down less than 25% monthly.
Risk Level is calculated taking the historical standard deviation measures.
Financial Glossary / Acronyms
EPS = Earnings per Share
ROA = Return on Assets (adjusted net profit/average total assets)
ROE = Return on Equity (adjusted net profit/average total equity)
CAGR = Compound Annual Growth Rate
((End Value/Start Value) ^ (1/number of years) -1)
GP= Gross Profit
EBITDA= Earnings before interest, tax, depreciation and amortization
PBT= Profit before tax
PAT= Profit after tax
NP= Net Profit
PBV= Price to book value ratio
PE= Price to earnings ratio
NBFI= Non-Banking Financial Institutes/Licensed Finance Companies
LCB= Licensed Commercial Bank
HP= Hire Purchase
NIM= Net Interest Margin
NPA/NPL= Non-Performing Advances
CSE= Colombo Stock Exchange
LOFC= Lanka ORIX Finance Company PLC
LFIN= LB Finance PLC
PLC= People’s Leasing & Finance PLC
CLC= Commercial Leasing & Finance PLC
COCR= Commercial Credit & Finance PLC
COMB= Commercial Bank of Ceylon PLC
NDB= National Development Bank PLC
SEYB= Seylan Bank PLC
HNB= Hatton National Bank PLC
SAMP = Sampath Bank PLC
UBC= Union Bank of Colombo PLC
PABC= Pan Asia Banking Corporation PLC
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No part of the compensation received by the analyst(s) was, is or will be directly or indirectly related to specific inclusion of specific recommendation or views
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