Australian Finance Group Ltd

Company Overview: Australian Finance Group Ltd (ASX: AFG) is one of the leading mortgage group that helps its customers in obtaining residential and commercial mortgages and other loan products. The company is involved in mortgage origination and management of home loans and commercial loans. It is also involved in the distribution of its own branded home loan products, white label and its established RMBS programme. The company was founded in 1994 and it was listed on ASX in 2015.

AFG Details

Decent Outlook Supported by a Solid Pipeline of Lodgements: Australian Finance Group Ltd (ASX: AFG) is one of the leading mortgage group with an established and diversified network of brokers across Australia, offering a variety of products. As on 8 April 2021, the company’s market capitalisation stood at ~$751.47 million. Despite the challenging conditions caused by the COVID-19 pandemic, the company was able to deliver positive results in H1FY21 with 41% growth in Underlying NPAT, demonstrating the ongoing success of its earnings diversification strategy. Looking at the past performance over the period of FY16-20, the company’s NPAT has grown at a CAGR of ~13.82%.

AFG remains committed of earning diversification strategy and is focused on pursuing further organic or inorganic growth opportunities. Further, it is focused on generating decent cash flows, which will allow it to invest for future growth. With a healthy balance sheet, a solid pipeline of lodgements and a good cash flow, the company seems well equipped to continue to deliver value to its brokers and customers and returns for its shareholders.

Five-year Financial Summary (Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)  

Decent Growth in H1FY21 NPAT: For the half-year ended 31 December 2020, the company reported revenue of $361,928k, up 11.4% on the previous corresponding period (pcp), with the AFG Securities book growing by 18% and residential settlements up by 24%. The residential volumes during H1FY21 were supported by Government initiatives. Underlying profit grew by 41% YoY to $24.9 million in H1FY21, underpinned by a decent net interest margin (NIM). Reported NPAT stood at $24.97 million, up by 36% on pcp. Net cash flows from operating activities stood at $25,788k in H1FY21, up ~52.9% on pcp, driven by increased net interest income, offset by higher income tax paid compared to the prior period. Over the period, AFG securities loan book grew by 18% to $2.96 billion. As at 31 December 2020, the company had unrestricted cash, trail book assets, financial assets and sub-ordinated capital of around $267 million.

H1FY21 Results (Source: Company Reports)

FY20 Result Highlights: For the year ended 30 June 2020, the company reported total revenue of $698 million, up 6% on the previous year. Further, the company reported growth in the AFG securities book of 41% and residential settlement growth of 9%. As a result of 34% growth in net interest margin, growth in the AFG Securities book, underlying profit increased by 27% to $36,266k in FY20. Over the years, the company witnessed growth in AFG Securities, supported by considered product improvements and consistent credit turnaround times. Combined residential and commercial loan book stood at $163 billion in FY20, up 5% on the previous year.

FY20 Result Highlights (Source: Company Reports)

Key Metrics: The company’s profitability margins have improved over the previous year, supported by the growth in AFG securities book and residential settlements.  EBITDA margin for FY20 stood at 8.4%, up from 7.5% in FY19. Gross margin for FY20 stood at 13.7%, up from 12.4% in FY19. ROE for FY20 stood at 26.9%.

Past 5-year Financial Performance For Year Ending 30 June; Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Top 10 Shareholders: The top 10 shareholders together form around 44.02% of the total shareholding, while the top four constitutes the maximum holding. Watkins (Malcolm) and McKeon (Brett Murray) are holding a maximum stake in the company at 6.52% and 6.08%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Dividend History: AFG has a track record of paying a decent dividend to its shareholders. For FY20, the company had paid a total dividend of 10.1 cents per share. From 2016 to 2020, the dividend has increased at a CAGR of ~4.72%. For H1FY21, the company has paid an interim dividend of 5.9 cents per share, up by 9% on pcp. At the CMP of $2.860, the company’s annual dividend yield stood at 3.78%.

Dividend Track Record (Source: Company Reports)

Trading Update: During January 2021, the company witnessed positive growth in residential volumes in all states and its residential lodgements grew by 28% YoY to $4.8 billion with settlements of $3.7 billion. Further, AFG Home Loans lodgements grew by 4% on the previous year. During the month, brokers around the country continue to maintain high levels of activity, despite various state lockdowns.

Key Risks: The company is exposed to risks and uncertainties caused by the COVID-19 pandemic. AFG operates in sectors that may face increasing levels of competition, including competition from business models using new technology platforms. Investors should also note that AFG is currently trading at higher levels, as its CMP above the average its 52-week price level range of $1.185 - $3.160.

Outlook: Due to the COVID-19 pandemic, the customers are not returning to bank directly, which has resulted in increasing the market share of brokers in the mortgage industry. The increasing role of brokers and their high levels of activity is expected to play in favour of AFG. Looking ahead, the company expects Government initiatives to continue supporting its residential volumes. Further, the company is focused on improving its technology to support its brokers and customers as they embrace the new ways of working. The company continues to maintain a capital light business model which allows it to pursue future organic or inorganic opportunities. With its healthy balance sheet and its ability to adapt to uncertain and changing market conditions, AFG seems well placed to navigate through the COVID-19 pandemic and deliver the return to its stakeholders.

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

Data Source: Refinitiv, Thomson Reuters, 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 provided a return of 5.92% and is trading above the average 52-week price level range of $1.185 - $3.160. On the technical analysis front, the stock has a support level of ~$2.356 and a resistance of ~$3.082. We have valued the stock using P/E multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We believe the company can trade at a slight premium to its peers, considering modest outlook, improved H1FY21 results, and increasing market share of brokers. We have taken peers like, Australia and New Zealand Banking Group Ltd (ASX: ANZ), Bank of Queensland Ltd (ASX: BOQ), Mortgage Choice Ltd (ASX: MOC), etc. Considering the company’s improved results in H1FY21, decent cash flows, rising residential volumes and lodgements, modest long-term outlook, and valuation, we give a “Buy” recommendation on the stock at the current market price of $2.860, up by 2.142% as on 8 April 2021.

AFG Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision 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 Valuation has been achieved and subject to the factors discussed above.

Disclaimer

Kalkine New Zealand Limited is authorised to provide class advice only. The information on this site does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.