Australian Finance Group Ltd

Company Overview: Australian Finance Group Ltd (ASX: AFG) is mainly involved in mortgage origination and management of home loans and commercial loans. The company is also involved in the distribution of its own branded home loan products. Under its Wholesale Mortgage Broking segment, AFG provides its contracted brokers with administrative and infrastructure support as well as access to a panel of lenders. The company was listed on 22 May 2015.

AFG Details

Key Takeaways from FY21 Results: During the year ended 30 June 2021, AFG brokers witnessed record demand for its services and the company’s core residential business delivered $43.6 billion in settlements, which is 28% higher than FY20, supported by the Government stimulus, low interest-rate and improved economic outlook. Some of the key highlights of FY21 are as follows:

• Rise in Revenue: For FY21, AFG reported total revenue of $767.14 million, up ~11% on the previous year, supported by settlement and loan book growth across the business.
• Increase in Operating Cashflow: Over the year, the company’s operating cash flow grew by 45% YoY to $58.6 million in FY21, supported by established trail books providing annuity style cash flows.
• Rise in Reported NPAT: Reported NPAT for FY21 stood at $51.3 million, up ~35% on FY20, supported by growth in revenue and loan book.
• Robust Balance Sheet: As at 30 June 2021, the company had unrestricted cash, net trail book and investments of $282.12 million, up from $257.82 million as at 30 June 2020.

Five Year Summary (Source: Analysis by Kalkine Group)

Key Metrics: Gross margin for FY21 stood at 14.1%, up from 13.9% in FY20. EBITDA margin for FY21 stood at 9.6%, up from 8.5% in FY20. Net margin for FY21 stood at 7.3%, up from 6.1% in FY20. ROE for FY21 stood at 26.9%, in line with 26.9% in FY20.

Profitability Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 41.05% of the total shareholding, while the top four constitute the maximum holding. Watkins (Malcolm) and McKeon (Brett Murray) are holding a maximum stake in the company at 6.51%, and 6.07%, respectively, as also highlighted in the chart below:                   

(Source: Analysis by Kalkine Group)

Dividend History: For H2FY21, AFG has paid a final dividend of 7.4 cents per share, up 57% on pcp. This took the total dividend to 13.3 cents per share, representing 80% of underlying profit excluding share of profit of associates. From 2017 to 2021, the company’s total dividend increased at a CAGR of ~8.21%, demonstrating the company’s focus on rewarding its shareholders via dividends. At CMP of $2.385, the company’s annual dividend yield stood at 5.56%.

Dividend Trend (Source: Analysis by Kalkine Group)

Australian Home Loan Market Update: In an update provided on 12 October 2021, AFG reported that Australian home loan market has hit new highs as more customers are choosing fixed rate mortgage due to low interest rate environment. For the first quarter of FY22, AFG brokers reported a record $24.1 billion in home loan finance, which is 7% higher than the previous quarter, and 33% higher than the previous corresponding period. The company also reported that the national average mortgage size has increased more than $600,000, which is 17% more than the previous corresponding period.

Latest Developments:

• On 14 September 2021, AFG announced the appointment of Mr. Greg Medcraft as an independent Non-Executive Director.
• On 5^th November 2021, Milford Asset Management Limited ceased to be a substantial holder in the company.
• The company is planning to hold its Annual General Meeting (AGM) on 26 November 2021.

Key Risks:

• Market Risks: AFG is exposed to risks related to fluctuations in foreign exchange rates, interest rates and equity prices as it could impact the company’s income, and the value of its holdings of financial instruments.
• COVID-19 Uncertainties: The uncertainties surrounding the COVID-19 pandemic could impact the lending markets, which could affect the company’s outlook.

Outlook: AFG expects that the residential mortgage market will continue to grow in FY22. The company is rolling out new market leading technology platforms to enable brokers to efficiently service customer needs, which will support its brokers to gain market share. The company expects the white label residential settlements to grow further in FY22, due to the expected inclusion of a Volt-funded white label AFG Home Loans product in the second half of FY22. With its robust balance sheet, decent cash flows from annuity style trail and loan books, AFG seems well placed to pursue organic and inorganic opportunities. AFG is planning to invest in growth opportunities, including higher-margin AFG Securities products, its new broker platform, and Thinktank manufacturing.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has corrected by ~17.18% and is trading lower than the average 52-week price level band of $2.3 - $3.16. The stock has been valued using P/E multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight premium to its peers, considering the improved conditions in Australian home loan market, rise in national average mortgage size, and modest outlook. For the purpose of valuation, peers such as Bank of Queensland Ltd (ASX: BOQ), Australia and New Zealand Banking Group Ltd (ASX: ANZ), and Westpac Banking Corp (ASX: WBC), etc. have been considered. Considering the improved FY21 results, decent track record of paying dividend, modest outlook in the long run, current trading levels and valuation, we give a “Buy’ rating on the stock at the current market price of $2.385 as on 18 November 2021, 1:40 PM (GMT+10), Sydney, Eastern Australia).

AFG Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

Disclaimer

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