CFIN Corporate Update - STRONG BUY - 31 03 17 - FC Research

CENTRAL FINANCE COMPANY PLC

Corporate Update - STRONG BUY

Current Price: LKR 87.0 Fair Value: LKR 107.0

“Strong Performance Sustained”

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Central Finance Company PLC (CFIN) is the 3rd largest Non-Bank Finance Company based on Market Capitalization having a total asset base of LKR 78Bn. The company has the highest credit rating among privately-owned finance companies, an A+ with a stable outlook assigned by Fitch Ratings. We initiate coverage on CFIN at a time when the share is trading at an attractive discount to its fair value giving an annualized return of 26%. STRONG BUY.

Portfolio growth sustained at a CAGR of 10% FY16-19E: CFIN’s portfolio is expected to record a growth at a CAGR of 10% (FY13-16 CAGR: 12%) driven by the increasing GDP per capita and sustained private sector credit growth. IMF forecasts private sector credit growth to continue at 14%-15% levels between 2017E-2020E. The effects of slowing down new vehicle registrations due to increased duties is expected to be partially offset by the growth in second hand vehicle market and the increasing loans and advances to SME, construction, transportation and services sectors.

Lower impairments and low cost funding enhances bottom line: CFIN is benefitted by rising vehicle prices that prompt customers to make timely payments and secure their loans, leading to lower impairments. In addition, the company enjoys the healthy credit rating of A+ with a Stable Outlook by Fitch Ratings, enabling it to access low cost funding. Moving from leases to loans further enables CFIN to re-price the loans in a rising interest rate environment. These factors support and enhance the bottom-line growth.

CFIN to provide an annualized return of 26% by FY18E: FC Research estimates CFIN’s fair value at LKR 107.0 (Justified PBV based LKR 125.0, PER based LKR 138.0, Residual income based LKR 95.0 and applied an illiquidity discount of 10% for lower trading volumes) giving a total return of 26% (capital gain of 23% and dividend yield of 3%) in FY18E. FC Research further estimates CFIN’s fair value at LKR 120.0 in FY19E.

Investment risks: Interest rate risk, regulatory and government policy-related risk, credit risk and liquidity risk are key risks CFIN faces.

Disclosure on Shareholding:

Neither First Capital Group nor its affiliates have traded in the shares of CFIN in the three trading days prior to this document, and will not trade in the shares of CFIN for three trading days following the issue of this document.

Discount for liquidity:

The fair value of CFIN has been adjusted 10% downwards to reflect the lower trading volumes of the share compared to the average trading volume of the market.