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Initiating Coverage - STRONG BUY
Current Price: LKR 15.5 Fair Value: LKR 20.0
“Stalwart Diversified Financier”
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People’s Leasing and Finance, is the largest company in the Non-Bank Financial sector in terms of both asset base and lending portfolio with total assets of LKR 131Bn and LKR 111Bn respectively as at FY16. Earnings recorded a CAGR of 15% over a period from FY13-16 on the back of improved loan/ total asset ratio that recorded at 85% in FY16. We expect PLC earnings to reach c.LKR 5.6Bn in FY18E. PLC at fair value of LKR 20.0 for FY18E is expected to provide total return of 42% at current price level of LKR 15.5. STRONG BUY
Margins and Spreads to improve: We expect PLC’s net interest margins to record at c.9.95% while interest spreads are expected to register at c.7.7% in FY18E on the back of shift in the lending portfolio from lease/ hire purchase to loans whereby capturing the changes in the interest rate volatility in credit disbursements. Further, with higher credit rating coupled with long term borrowing as the main source of funding as opposed to acceptance of deposits is likely to enable to maintain the average cost of funding at low levels.
Reducing Impairment provisioning: PLC’s impairment charges declined by a considerable 83%YoY to LKR 291Mn in FY16 primarily due to the improved recovery and disposal loss management mechanisms. We expect the impairment provision as a percentage of total lending portfolio to register at c.0.25% with total provision of c.LKR 372Mn in FY18E in on the back of improved credit disbursement, lower exposure levels and effective recovery processes.
PLC to provide a 42% return over 12-months period: FC Research expect PLC.N to achieve a fair value of LKR 20.0 providing a total return of 42% (Dividend yield 13%) over 12-month period. [Justified PBV based LKR 21.3, Residual income based LKR 16.2 and PER based LKR 21.2].
Risks associated: Given the nature of the industry PLC is exposed to credit, market and regulatory risks.
Disclosure on Shareholding:
First Capital Group or its affiliates do not hold shares in PLC. Neither First Capital Group nor its affiliates have traded in the shares in the three trading days prior to this document, and will not trade in the shares for three trading days following the issue of this document.
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