nbf sector - february 2013

7/29/2019 NBF Sector - February 2013

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SECTOR UPDATE

February

2013

SOFTLOGIC

EQUITY RESEARCH

Analyst: Crishani Perera

[email protected]


2/27

Contents Page No.

NBF Sector Overview 03

NBF Recent History 2009-2012 11

NBF Sector Outlook 2013E-2015E 16

NBF Sector Key Picks Recommendation 22

SOFTLOGIC

EQUITYRESEA

RCH

2


3/27

NBF Sector Overview

The Non Bank Financial Institutions (NBFI) consist of Licensed Finance

Companies (LFC) and Specialised Leasing Companies (SLC) where Leasing &Hire purchase products for vehicle financing remains the prime business of

the sector.

The sector currently comprises of 47 LFCs and 16 SLCs with a total asset

strength of around LKR489.9 bn which reflects nearly 11.5% of the bankingindustry.

The NBF sector revived during 2011 amidst sharp escalation in credit

demand with the drop in interest rates and lower duties on motor vehicles.

However, the industry witnessed a substantial slow down during 2012 with

the economic reforms implemented early year targeting to improve external

trade position of the economy and to limit excessive credit growth driven by

consumption. 3

SOFTLOGIC

EQUITYRESEA

RCH


4/27

4

NBF Sector At a Glance

37%

27%

16%

6%

5%

5%3%

1%

NBFI Asset Composition

Leasing

Hire Purchase

Loans

Investments

Pawning Advances

cash and Bank

Balances

Investments in Govt.Securities

Real Estate

LKR mn 2007 2008 2009 2010 2011

licensed Finance Ccompanies

Number of Institutions 52 55 56 58 55

Total Assets 238,077 285,558 297,350 387,852 489,888

Investments 15,306 20,361 26,037 47,009 25,849

I nves tments i n Govt. Securi ti es 9,018 11,690 14,711 20,237 12,525

Loans & Aadvances 171,387 198,154 192,262 259,750 383,683

Leasing 79,886 79,257 64,477 87,503 166,051

Hire Purchase 53,332 66,620 69,992 96,036 118,400

Loans 26,277 36,012 41,946 53,545 72,664

Real Estate 9,245 1 0,778 8,376 7,435 6,000

Pawning Advances 2,647 5,487 7,471 15,231 20,568

Fixed Assets 15,077 17,410 17,121 19,989 16,479

capital Account 37,620 43,844 41,175 48,098 77,027

Fixed Deposits 75,975 99,816 1 14,489 1 40,196 1 79,259

Savings Deposits 1,379 2,751 4,465 5,074 5,938

Certificate of Deposits 861 910 843 850 810

Bo rr owi ngs 9 3,1 78 1 03 ,3 32 9 3,0 71 1 38 ,9 42 1 71 ,5 86

-from Commercial Banks 48,465 59,868 50,205 82,284 87,485

Provi si on for Bad & Doubtful Debts 5,075 6,072 9,224 12,599 10,948

Net NPA % 2.20% 2.80% 4.50% 3.40% 1.90%

Total Provi si on Cover rati o 57.10% 51.40% 51.40% 60.30% 55.40%

Speci fi c Provi si on cover rati o 47.10% 42.10% 35.90% 42.90% 45.20%

NIM 5.50% 4.60% 4.10% 6.0% 6.40%

ROA 2.20% 1.50% 0.40% 2.80% 4.60%

ROE 13.90% 9.70% -2.90% 11.30% 24.70%

Bank ing Indus tr y - As s ets 2 ,504,201 2 ,697,450 3 ,013,256 3 ,550,515 4 ,252,234

Share 9.5% 10.6% 9.9% 10.9% 11.5%

Lease & hire purchases account for c.74% of total sector credit

Source: Central Bank of Sri Lanka

SOFTLOGIC

EQUITYRESEARCH


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Deposits remain the prime source of

funding of NBFIs

SOFTLOGIC

EQUITYRESEARCH

5

Fixed

Deposits

96%

Savings

Deposits

3%

Certificate

of

Deposits

1%

Deposits remains the single largest funding source of

NBFIs consisting c.38% of the total sector liabilities.

Sector deposits grew by 27% YoY during 2011, where

deposit base is expected to have grown at a faster pace

during 2012 with the prevailed high interest rates.

The high-cost fixed deposits dominate the deposit base ofNBFIs with a major share of 96%.

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

35.0%

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

200,000

2007 2008 2009 2010 2011

LKR mn Steady growth in sector deposits...

Deposits % growth YoY



6/27

Increased share of Borrowings &

shareholder funds in the funding mix

Industry funding composition

SOFTLOGIC

EQUITYRESEARCH

6

The share of borrowings & capital funds in the industry funding mix has increased

comparatively to deposits as the deposit growth struggled to keep pace with the

aggressive expansion in credit.

Further strong internal capital generation and capital infusion in terms of IPOs

improved the proportion of shareholder funds in the industry funding mix (capital

funds grew by c.60% YoY during 2011 compared with a c.17% growth in 2010).

12% 12% 15% 14% 11%

16% 15% 14% 12% 16%

39% 36%31% 36% 35%

33% 36% 40% 38% 38%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2007 2008 2009 2010 2011

Other Liabilities Capital Funds Borrowings Deposits Source: Central Bank of Sri Lanka


7/27

Most NBFIs manages to maintain strong

capitalization levels

Focus on revival of distressed companies to further strengthen the

capital funds of the sector

Central Bank has implemented business revival plans for distressed finance

companies while continuously monitoring the progress.

SOFTLOGIC

EQUITYRESEARCH

7

The capital position of the NBFIs were cushioned by the strong capital infusion through

IPOs and rights issues during 2011 (mandatory listing requirement imposed by theregulators on LFCs by end June 2011).

Listing opened up access to public funds for NBFIs increasing industry financial

flexibility.

Further improved profitability of the sector has led to strong internal capital

generation.

Consequently the industry total capital ratio increased to 14% as of end 2011(regulatory minimum of 10% imposed during 2011) from a 6% as of end 2010.


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Asset Quality under pressure amidst

challenging economic conditions

In general, the NBFIs asset quality is weaker compared with banksparticularly with the high risk involved with the target clientele.

The NPL ratios showed improvement during 2011 with gross NPL ratio

declining to 4.7% from a 7.9% as of end 2010.

The concentration of industry loan portfolios into areas such as

pawning and three-wheeler leasing where the slippages are relativelylow coupled with aggressive growth in credit contributed towards the

improvement.

However, the inflationary pressures and prevalent high interest rates

have led to increasing NPLs during 2012 which is likely to continue to

2013 as well. However an improvement could be expected towards 2H2013 with the

possible easing of inflation and interest rates.

SOFTLOGIC

EQUITYRESEARCH

8


9/27

Regulatory tightening assisting to improve

public confidence

Key policy measures implemented incudes

SOFTLOGIC

EQUITYRESEARCH

9

Direction to increase minimum capital requirement of NBIs to LKR400 mn from a

LKR200 mn by end 2014.

Direction in respect of fitness & propriety of Directors.

Deadline to list on the CSE (end June 2011), by end December 2012, 35 companies

out of 47 have listed.

Passing the Finance Business Act in September 2011 repealing & replacing the exiting

Finance Companies Act.


10/27

SOFTLOGIC

EQUITYRESEARCH

10

Performance Summary of sample Listed

NBFIs

31.12.2011 31.12.2011 Gross NPA NIM Cost-to-income ROA ROE Tier II Capital

People's Leasing & Finance PLC:LKR14.0 94,570.0 19.8% 8,538.0 0.95% 9.7% 26.2% 9.0% 33.8% 22.2%

Central Finance CFIN:LKR181.0 49,477.4 11.8% 21,428.4 1.65% N/A 43.0% 5.2% 22.3% 22.6%

LB Finance LFIN:LKR144.9 38,902.6 9.9% 24,022.0 2.70% N/A 40.2% 5.0% 49.5% 12.3%

Lanka Orix Finance LOFC:LKR3.2 38,349.6 8.6% 25,094.7 N/A N/A 41.8% 4.0% 30.0% 14.4%

Commercial Leasing & Finance CLC:LKR3.8 26,381.4 5.0% 385.3 2.80% N/A 47.5% 4.0% 23.0% N/A

Citizen Development Business CDB:LKR40.9 14,828.7 4.1% 10,513.3 1.60% 9.3% 60.1% 4.2% 34.4% 16.7%

Alliance Finance ALLI :LKR7 75 .0 1 1,4 03.6 3.0% 6,191.4 2.45% 9.8% 61.0% 4.5% 40.5% 12.6%

Senkadagala Finance SFCL:LKR50.0 10,075.7 2.6% 2,556.6 1.53% 14.7% 44.1% 6.0% 40.9% 16.0%

Vallibel Finance VFIN:LKR29.6 6,265.4 1.6% 3,501.9 1.90% N/A 38.9% 4.2% 42.2% 15.2%

Singer Finance SFIN:LKR12.2 6,032.2 1.5% 2,663.0 0.47% 12.6% 43.6% 5.3% 22.0% 18.1%

Swarnamahal Finance SFS:LKR3.4 5,315.0 1.2% 4,399.0 0.30% 14.9% 54.3% 5.3% 38.7% 25.1%

Abans Financials AFSL:LKR30.0 2,702.1 0.5% 1,633.4 6.96% N/A 58.7% 2.2% 14.2% 20.8%

Capital Alliance Finance CALF:LKR16.0 639.0 0.2% 303.4 N/A 10.0% 20.9% 3.3% 7.1% 42.8%

Industry 489,888.0 186,007.0 5.10% 6.4% 54.6% 4.6% 24.7% 14.0%

Companyas of 31.12.2011 or 31.03.2012Total Assets

Market ShareStock code

Total Deposits

Source: Company, Central Bank of Sri Lanka


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A GLANCE ON THE

RECENT HISTORY 2010-2012SOFTLOGIC

EQUITYRESE

ARCH

11


12/27

2010-2011; A Period of Revival for NBFIs

SOFTLOGIC

EQUITYRESE

ARCH

12

Following the liquidity issues faced during 2009 amidst the collapse of a reputed

finance company, the NBFI sector witnessed a gradual recovery during 2010.

Reasoned by conducive economic conditions coupled with measures taken by CentralBank to boost public confidence in NBFIs, all performance aspects of the sector

including lending, deposits, asset quality & profitability improved substantially during

2010-2011.

Nevertheless, few distressed NBFIs continued to witness deterioration of capital and

liquidity shortages negatively affecting the overall sector performance.

13.90%

9.70%

-2.90%

11.30%

24.70%

0%

2%

4%

6%

8%

10%

12%

-5%

0%

5%

10%

15%

20%

25%

30%

2007 2008 2009 2010 2011

NIMROE, ROA

NBFI Sector Profitability Indicators revived during 2010-

2011...

ROE NIM ROA

4%

5%

6%

7%

8%

9%

10%

50,000

125,000

200,000

275,000

350,000

2007 2008 2009 2010 2011

Gross NPL %LKR mn

Loans & Advances Deposits Gorss NPA %



13/27

NBF Sector Assets expanded c.65% during 2010-2011...

-

100,000

200,000

300,000

400,000

500,000

600,000

2008 2009 2010 2011 2012E

Vehicles

New Vehicle Registrations Trend 2008-2012

2008 2009 2010 2011 2012E

Hike in motor taxes and

rising interest rate

environment dampeneddemand

+157.5% growth driven by higheconomic growth, slash in vehicle

import duties coupled with low

interest rates

Recessionary

impact -

Economic growth

dropped to 3.5%

13

6%

8%

10%

12%

14%

16%

18%

20%

22%

Jan-08

Apr-08

Jul-08

Oct-08

Jan-09

Apr-09

Jul-09

Oct-09

Jan-10

Apr-10

Jul-10

Oct-10

Jan-11

Apr-11

Jul-11

Oct-11

Average Weighted Prime Lending Rate 1 Year Yield

The low interest rate regime

prevailed from early 2010 till latter

2011 accelerating the sector

accommodations growth.

Substantial tax cuts for motor

vehicles implemented during mid-

2010 led vehicle imports to grow to

+500k during 2011 from c.51kduring 2009.

Source: Central Bank of Sri Lanka , Softlogic Equity Research

SOFTLOGIC

EQUITYRESE

ARCH

2012 I d t Sl d A id t


14/27

Reasoned by several factors including low interest rates and import duty

reductions, the private sector credit growth exceeded original estimates by far,

growing by +35% YoY during 2011. The excessive credit growth was observed with

trade related credit and credit driven by import related items such as motor

vehicles & consumer durables growing substantially.

Consequently, government took several policy measures during early 2012 which

slowed down the economic growth during the year, which had a substantial impact

on the NBFI sector performance during 2012.

SOFTLOGIC

EQUITYRESE

ARCH

14

2012; Industry Slows down Amidst

Economic Reforms

-1200

-1000

-800

-600

-400

-200

0

0

200

400

600800

1000

1200

1400

1600

1800

2000

Trade Deficit (USD mn)Exports & Imports (USD mn)

Signs of a fresh BOP crisis towards latter 2011 triggered policy measures..

Exports Imports Balance of Trade


G li d i i l dd hd i


15/27

Government policy decisions slowed down sector growth during

2012

Hike in policy rates leading themarket interest rates to climb up

coupled with the increase in vehicleduties directly brought downdemand for NBFI sectordisbursements substantially.

The steep depreciation of the rupeefollowing the implementation offlexible exchange rate systemnegatively affected the importdemand for vehicles (during Jan-Oct2012 new vehicle registrations fell by20.1%).

A credit ceiling of 18%-23% oncommercial bank lending for 2012limited the access to borrowingsfrom commercial banks by NBFIs.

SOFTLOGIC

EQUITYRESE

ARCH

15

6

8

10

12

rate%

Policy rates increased by 75 bps in February

2012

CBSL Repurchase Rate (%) CBSL Reverse Repurchase Rate (%)

108

111

114

117

120

123

126129

132

Jan-10

Mar-10

May-10

Jul-10

Sep-10

Nov-10

Jan-11

Mar-11

May-11

Jul-11

Sep-11

Nov-11

Jan-12

Mar-12

May-12

LKR Rupee depreciated by c.15% during 1H2012

LKR/USD



16/27

NBF SECTOR OUTLOOK

SOFTLOGIC

EQUITYRESE

ARCH

16


17/27

Accelerated growth in NFBI credit portfolio

NBFI credit growth surpassing overall private

sector credit increase

leading NBFIs market share to escalate to

10.64% in 2011 from a 6.4% in 2006

SOFTLOGIC

EQUITYRESE

ARCH

17

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

2006 2007 2008 2009 2010 2011

LKR mn

Total Credit to Private Sector Private Sector credit % YoY

NBFIs total credit % YoY

6.43%

10.64%

6%

7%

8%

9%

10%

11%

2006 2007 2008 2009 2010 2011

RFC Market Share in private sector credit


NBFI S A G CAGR f


18/27

SOFTLOGIC

EQUITYRESE

ARCH

18

NBFI Sector Assets to Grow at a CAGR of

15% 2012 -2015E..

98% Correlation between NBFI Sector Assets & Per Capita GDP

1,4211,617

2,014 2,057

2,4002,836

2,922

3,435

3,969

4,574

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

2006 2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

USDLKR mn Per Capita GDP to Reach +USD4,000 by 2016...

NBFI Sector Assets Per Capita GDP

Source: Central Bank of Sri Lanka, Softlogic Equity Research

Growing vehicle population cushions NBF


19/27

Growing vehicle population cushions NBF

sector growth

Per capita GDP Used Vehicle population

SOFTLOGIC

EQUITYRESE

ARCH

19

Central Bank targets to reach USD4,000 milestone in per capita GDP by 2016 from a current USD2,922 (estimated

for 2012).

The expected growth in per capita GDP coupled with the healthy growth expected in the economy would increase

the affordability of vehicles thus contributing to increase the total used vehicle population of the economy.

This will create a multiplying effect on the demand for lease & hire purchase products.

Following the policy measures, the economic growth is expected to gather momentum during the coming periods,

which would create better demand for credit.

0

500

1000

1500

2000

2500

3000

3500

4000

4500

5000

2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

USD

-

500,000

1,000,000

1,500,000

2,000,000

2,500,000

3,000,000

3,500,000

4,000,000

2007 2008 2009 2010 2011 2012E 2013E 2014E 2015E

* Useful economic life of a vehicle is assumed to be 10 years. All

vehicles older than 10 years are deducted in calculating vehicles

currently in use.Source: Central Bank of Sri Lanka, Softlogic Equity Research


20/27

Accordingly, we forecast the NBFI sector assets to grow at a CAGR of

15.3% 2012-2015E.

SOFTLOGIC

EQUITYRESE

ARCH

20

489,888.0

864,544.7

0

100,000

200,000

300,000

400,000

500,000

600,000

700,000

800,000

900,000

1,000,000

2011 2015E

LKR mn

NBFI Assets

3 leading companies


21/27

3 leading companies

Account for nearly 40% of NBF

sector asset base

Low cost-to-income

SOFTLOGIC

EQUITYRESEARCH

21

Superior ROA

19%

10%

8%

63%

People's Leasing & Finance Central Finance

LB Finance Other

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

People's Leasing &

Finance

Central Finance LB Finance

ROA Industry ROA

0.0%

10.0%

20.0%

30.0%

40.0%

50.0%

60.0%

People's Leasing &

Finance

Central Finance LB Finance

Cost-to-income Industry cost-to-income

Source: Central Bank of Sri Lanka, Softlogic Equity Research, Company


22/27

SOFTLOGIC

EQUITYRESEARCH

22

NBFI Sector Key Picks

Recommendation

Larger Players remain the key attraction

3 leading companies account for nearly 40% of market share

Strong established brand image and wide spread distribution network secures

relatively low cost of funding & low cost-to-income ratio

Valuations at a discount to broader market

Accordingly we rate LB Finance, Peoples Leasing & Finance and Central Finance as key

buys of the sector at current prices


23/27

PEOPLES LEASING & FINANCE [PLC : LKR13.4] BUY

SOFTLOGIC

EQUITYRESEARCH

23

PLC, the established market leader in Sri Lankas Leasing & Hire Purchase industry accounts for

nearly 17% of the countrys total finance sector assets, which stood at LKR96.8 bn as at

31.12.2012. PLC comprises of 6 subsidiaries having interest into insurance, Islamic finance,

micro finance, fleet management and property development, yet the companys main interest

lies with lease & hire purchase products. PLCs assets grew at an impressive CAGR of 41.5%

during FY08-FY12.

High interest rates hamper earnings growth during 1-3QFY13.PLCs net earnings plummeted by39% YoY to record LKR2,039 mn during 1-3QFY13 reasoned stagnant credit volumes & erosion in

NIM with the rising interest rate environment prevailed, whilst further burdened by the surge in

provision for credit losses (up 160.8% YoY to LKR825 mn) reasoned by the rise in slippages amidst

adverse economic conditons.

Forecast recurrent earnings to record LKR2,691 mn during FY13E (down 22.2% YoY). With the

worse than anticipated demand conditions affecting PLCs volumes, we forecast PLC to register

LKR2.61 bn in FY13E (down 22.2% YoY). With the anticipated recovery in the economy during

FY14E coupled with synergetic effects following the operational merger with Peoples Finance

[SMLL:LKR38.0] in mind, we forecast net earnings to touch LKR3.02 bn in FY14E (up 12% YoY).

Attractive Valuations. At LKR14.90, PLC currently trades at attractive valuations among the peer

finance sector players at PER 7.2X FY14E recurrent net earnings and PER 6.1X FY15E net earnings.

The counter currently trades at a PBV of 0.9X FY14E book value whilst having a DY of 4.8% FY14E.

We believe the counter still holds strong upside potential in the medium to long term given its

attractive valuations whilst being among the high dividend play counters in the CSE.

KEY DATA

Share Price (LKR)

Price Performance (%) 1 mth 3 mths 12mths

PLC -11% 22% 3%

ASPI -3% 6% 4%

Major Shareholders as at 31st December 2012

75.18%

3.97%

3.77%1.57%

1.15%Credit Suisse AG Zurich

Estimated Free Float 24.42%

Peoples Bank

Employees Provident Fund

National Savings BankDistilleries Company of Sr i Lanka PLC

Market Capitalisation (LKR mn) 20,904

Average Daily Volume (Shares) 320,673

Average Daily Turnover (LKR) 4,238,007

13.40

Issued Share Capital (Shares mn) 1,560

F/Y 31st Mar (LKR mn) FY10 FY11 FY12 FY13E FY14E FY15E

Net Profit (LKR mn) 1,152.5 2,604.8 4,503.0 2,691.0 3,015.2 3,590.2

Recurring Net Earnings (LKR mn) 1,152.5 2,604.8 3,458.3 2,691.0 3,015.2 3,590.2

Diluted EPS (LKR) 0.7 1.7 2.2 1.7 1.9 2.3

% Growth 11.0% 126.0% 32.8% -22.2% 12.0% 19.1%

PER (x) 18.1 8.0 6.0 7.8 6.9 5.8

BVPS (LKR) 4.0 5.4 11.9 13.9 16.4 19.6

ROE (%) 19.9% 35.8% 25.7% 13.4% 12.8% 12.8%

PBV (x) 3.4 2.5 1.1 1.0 0.8 0.7

Adjsuted DPS 0.0 0.0 1.0 0.6 0.7 0.8

DY (%) 0.4% 0.4% 7.5% 4.5% 5.0% 5.9%

EBITDA (LKR mn) 4,105.2 6,084.2 7,855.0 7,869.6 7,937.9 9,273.1

EV/EBITDA (X) 17.4 11.7 9.1 9.1 9.0 7.7


24/27

SOFTLOGIC

EQUITYRESEARCH

24

CENTRAL FINANCE [CFIN : LKR180.1] BUYCFIN being the second largest player among the LFCs holds a market share of nearly 12% based

on its asset strength (LKR59.8 bn as of 31.12.2012). The company established in 1957 saw its

asset base growing at a CAGR of 13.3% during FY09-FY12 adopting a cautious approach in a high

growth environment as the industry assets grew at a CAGR of c.20% during the same period.

Conservative strategy pays off as CFIN records steady 15.4% YoY growth in earnings during 1-

3QFY13 outperforming the sector. CFINs net earnings grew at a steady 15.4% YoY to LKR2.3 bnduring 1-3QFY13 which outperformed the peer performance justified by the conservative approach

taken by the company in growing its asset base during low interest rate regime (2010-2011).

Consequently the company was able to minimize the negative impact created from asset &

liabilities mismatch following the hike in interest rates thus securing margins registering an

attractive 19% YoY growth in NII during 1-3QFY13 despite challenging conditions.

Forecast net earnings to record LKR3,131 mn during FY13E (up 17% YoY). With CFIN combatting

the adverse economic conditions better than the peers due to the relatively lower asset & liabilities

maturity mismatch leading to steady margins, we expect it to record LKR3.13 bn in FY13E (up 17%

YoY). With the higher growth in the economy expected during FY14E stimulating credit demand

(assuming a loan portfolio growth of c.22%), we forecast net earnings to touch LKR3.89 bn in FY14E(up 24.1% YoY).

Valuations at a discount. CFIN currently trades at discount valuations at PER 6.0X FY13E recurrent

net earnings and PER 4.9X FY14E net earnings. The counter currently trades at a PBV of 0.9X FY14E

book value. We expect the counter to re-rate it upwards given its attractive valuations and steady

growth in profits.

KEY DATA

Share Price (LKR)

105

18,889Average Daily Volume (Shares) 29,375



CFIN -2% 12% 13%

ASPI -3% 6% 4%

16.11%

15.41%

6.25%

5.75%

4.77%



Corporate Services (Pvt) Ltd.

180.10

Issued Share Capital (Shares mn)

Market Capitalisation (LKR mn)

184.9/123.312 mt h High/Low (LKR)

E.H. Wijenaike

Employees' Provident Fund.

Thurston Investments L td.

Perpetual Capital (Pvt) Ltd.

F/Y Mar (LKR mn) FY10 FY11 FY12 FY13E FY14E

Net Profit (LKR mn) 1,046.1 1,827.0 2,676.6 3,131.3 3,886.5

% Growth -7.2% 74.6% 46.5% 17.0% 24.1%

Adjusted EPS (LKR) 10.0 17.4 25.5 29.9 37.1

% Growth -7.2% 74.6% 46.5% 17.0% 24.1%

PER (x) 18.1 10.3 7.1 6.0 4.9

PEG (x) (251.6) 13.8 15.2 35.5 20.2

Adjusted DPS 1.16 2.03 2.50 3.0 3.7

Dividend Payout (%) 11.6% 11.7% 9.8% 10.0% 10.0%

Div Yield (%) 0.6% 1.1% 1.4% 1.7% 2.1%

BVPS (LKR) 87.0 103.9 127.2 154.1 191.2

PBV (x) 2.1 1.7 1.4 1.2 0.9

ROAE (%) 12.1% 18.2% 22.1% 21.2% 21.5%


25/27

SOFTLOGIC

EQUITYRESEARCH

25

LB FINANCE [LFIN : LKR146.6] BUYLFIN, is one of the largest LFCs in Sri Lanka holding around 10% of the industry assets

(LKR51.4 bn as at 31.12.2012). Its lending portfolio has been primarily led by leasing & hire

purchase facilities and gold loans with its lease portfolio growing at a CAGR of 49% during

FY09-FY12.

Strong growth in lending amidst difficult economic conditions assist earnings to grow at 9.5%

YoY to LKR1,246.6 mn. LFIN secured a 9.5% YoY growth in earnings during 1-3QFY13 driven

primarily by strong 25.2% YoY increase in NII. The earnings growth was subdued by the 44.4%

YoY growth in operating expenses with incremental cost associated with branch expansions

coupled with hike in provision expenditure due to increased slippages amidst rising interest

rates.

Forecast net profit to record LKR1,826 mn during FY13E (up 12.4% YoY). With LFINs lease &

hire purchase disbursements assumed to grow at c.17% during FY14E driven by anticipated

improvement in economic conditions coupled with increased contribution from the new

branches, we forecast net earnings to grow at 22.2% YoY to LKR2.2 bn during FY14E.

Attractive Valuations. LFIN trades at a discount to broader market at PER 5.5X FY13E net

earnings and PER 4.5X FY14E net earnings. The counter currently trades at a PBV of 1.4X FY14E

book value whilst producing a DY of 4.7% FY14E. We believe the counter still holds strong

upside potential in the medium to long term given its attractive valuations and high growth

potential.

F/Y Mar (LKR mn) FY09 FY10 FY11 FY12 FY13E FY14E

Net Profit (LKR mn) 359.6 500.2 1,020.4 1,625.1 1,826.2 2,230.7

Adjusted EPS (LKR) 5 7.2 14.7 23.5 26.4 32.2

% Growth 75% 39% 104% 59% 12.4% 22.2%

PER (x) 28.2 20.3 10.0 6.2 5.6 4.6PEG (x) 38 51.9 9.6 10.5 44.9 20.5

Adjusted DPS 2 2.5 3.5 5.0 5.6 6.9

Dividend Payout (%) 29% 35% 24% 21% 21% 21%

BVPS (LKR) 19.5 25.4 37.7 57.8 78.6 103.9

ROAE (%) 31% 32% 47% 49% 39% 35%

Div Yield (%) 1% 2% 2% 3% 3.8% 4.7%

PBV (x) 7.5 5.8 3.9 2.5 1.9 1.4

KEY DATA

Share Price (LKR)

69.310,153

Average Daily Volume (Shares) 11,785



LFIN -1% 5% 6%

ASPI -3% 6% 4%

51.00%

25.98%10.11%

2.66%

1.38%

Market Capitalisation (LKR mn)

146.60

12 mth High/Low (LKR) 169.8/99.7

Issued Share Capital (Shares mn)



Vallibel One PLC

Royal Ceramics Lanka PLCEsna Holdings (Pvt) Ltd

Sri Lanka Inusrance Corporation - Life Fund

Mercantile Investment Ltd


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SOFTLOGIC

EQUITYRESEARCH

26

Peer Valuation Summary

Finance Sector

Peer Comparison EPS (LKR) EPS % YoY PER (X) PBV (X)

PLC:LKR13.4 1.9 12.0% 6.9 0.8

CFIN:LKR180.1 37.1 24.1% 4.9 0.9

LFIN:LKR146.6 32.2 22.2% 4.6 1.4

VFIN:LKR29.5 9.5 49.4% 3.1 1.0

LOFC:LKR3.3 0.3 6.1% 9.6 1.4

FY14E

-

500.0

1,000.0

1,500.0

2,000.0

2,500.0

3,000.0

3,500.0

4,000.0

4,500.0

PLC CFIN LFIN LOFC VFIN

LKR mn Profitability trend...

FY12 FY13E FY14E

Source: Company, Softlogic Equity Research

S f l i E i R h S f l i E i S l


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SOFTLOGIC

EQUITYRESEARCH

Softlogic Equity ResearchDimantha Mathew

[email protected]

+94 11 7277030

Akeela Imthinam Rasheed

[email protected]

+94 11 7277032

Crishani [email protected]

+94 11 7277031

Imalka Hettiarachchi

[email protected]

+94 11 7277004

Softlogic Equity SalesDihan [email protected]+94 11 7277010, +94 77 7689933

Chandima [email protected]+94 11 7277058, +94 77 7885778Shafraz [email protected]+94 11 7277054, +94 77 2333233

Sonali [email protected]+94 11 7277059, +94 77 7736059

Thanuja De Silva

[email protected]

+94 11 7277053, +94 77 3120018BranchesHoranaMadushanka Rathnayaka

No. 101, 1/1, Aguruwathota Road, [email protected]+94 34 7451000, +94 77 3566465MataraLalith Rajapaksha

No. 8A, 2nd Floor, FN Building,

Station Road, [email protected]+94 41 7451000, +94 77 3031159

NegamboKrishan Williams

No. 121, St. Joseph Street [email protected]+94 31 2224714-5, +94 77 3569827

KurunegalaBandula LansakaraNo.13, Rajapihilla Mawatha, [email protected]+94 37 2232875, +94 77 3615790

The report has been prepared by Softlogic Stockbrokers (Pvt) Ltd. The information and opinions contained herein has been compiled

or arrived at based upon information obtained from sources believed to be reliable and in good faith. Such information has not been

independently verified and no guaranty, representation or warranty, express or implied is made as to its accuracy, completeness or

correctness. All such information and opinions are subject to change without notice. This document is for information purposes only,

descriptions of any company or companies or their securities mentioned herein are not intended to be complete and this document is

not, and should not be construed as, an offer, or solicitation of an offer, to buy or sell any securities or other financial instruments.Softlogic Stockbrokers (Pvt) Ltd may, to the extent permissible by applicable law or regulation, use the above material, conclusions,

research or analysis in which they are based before the materialized disseminated to their customers. Not all customers will receive

the material at the same time. Softlogic Stockbrokers, their respective directors, officers, representatives, employees, related persons

and/or Softlogic Stockbrokers, may have a long or short position in any of the securities or other financial instruments mentioned or

issuers described herein at any time and may make a purchase and/or sale, or offer to make a purchase and/or sale of any such

securities or other financial instruments from time to time in the open market or otherwise, in each case either as principal or agent.

Softlogic Stockbrokers may make markets in securities or other financial instruments described in this publication, in securities of

issuers described here in or in securities underlying or related to such securities. Softlogic Stockbrokers (Pvt) Ltd may have recently

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purposes.

nbf sector - february 2013

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