PEOPLE’S LEASING (PLC.N)---Softlogic Equity Research

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The Net Interest Income (NII) grew by 6% YoY to LKR2.7 bn in 2QFY16 on the back of low interest expenses during the period. Interest expenses declined by c.23% YoY to LKR1.9 bn in 2QFY16 and the conducive low interest environment and low deposit base aided the interest expenses to edge down. Meanwhile interest income denoted a dip of c.9% YoY to LKR4.6 bn in 2QFY16 on the back of lower interest income generated from lease & hire purchases. The sub sector which accounts to near 70% of the aggregate interest income reported a decline of c.16% YoY to LKR3.2 bn during 2QFY16.

Non-Interest Income reported a growth of 5% YoY to LKR1.1 bn in 2QFY16. Premium income dominated the non-interest income segment with a contribution of c.76% and recorded a growth of 12% YoY to LKR817.0 mn in 2QFY16.

Net earnings escalated by 14% YoY to LKR1.2 bn in 2QFY16 against LKR1.1 bn in 2QFY15 on the back of healthy NII and non-interest income. Meanwhile, NIM’s improved by 6 bps YoY to 8.9% in 2QFY16.

Cost to income ratio improved to 47% in 2QFY16 against 50% in 2QFY15 on the back of stringent cost strategies. Operating expenses recorded an increase of 5% YoY to LKR1.7 bn in 2QFY16 out of which insurance benefits & claims dominated the total operating expenditure (c.34% contribution) with a marginal growth of c.4% YoY.

Loan book grew by c.10% YoY and c.4% QoQ to LKR103.5 bn in 2QFY16. Lease and hire purchases accounted to the majority of the total assets with a contribution of c.65% whilst loans and Islamic finance compositely contributed to c.29%.

Deposit base edged down by 14% YoY and incline by 1% QoQ to LKR34.1 bn in 2QFY16 given the low interest environment. Deposits from customer accounted to the majority (c.39%) of the total funding base whilst borrowings and debt securities contributed near 30% and 31% in 2QFY16.

We maintain our profit forecast of LKR4,683.4 mn (up 14% YoY) for FY16E and LKR5,281.2 mn (up 12% YoY) for FY17E despite the new regulatory measures on personal motor vehicle leasing brought in by the regulator. The new developments negatively impacted the finance & leasing industry although the impact to PLC which is predominantly into commercial leasing business (c.70% of total leasing business) is minimum. The imposition of LTV ratio and 100% margin on Letter of Credit were mainly targeted to curb the vehicle importation (total motor vehicle registration has edge up by c.86% YoY to 423,481 units in the first eight months of 2015) and thereby to ease off the currency pressure and improve BOP position.

Being the market leader in the leasing industry PLC is poised to reap benefits from the conducive macro environment. Hence is expected to curb interest margin pressure from increasing leasing volumes through the revival of private sector mega construction projects to maintain the interest margins of c.8% in FY16-17E.

Further with a ROE of c.19% and a high dividend play with an estimated yield of 7-8% in FY16-17E offers good value trading at 7.3x FY16E net profit and 6.4x FY17E earnings whilst trading on 1.4x PBV. Further PLC trades at par to the finance sector PBV of 1.4x. The fundamentals of the company remain strong and we maintain BUY.

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