Company Overview: Australian Finance Group Ltd (ASX: AFG) is a leading mortgage broking group mainly involved in mortgage origination and management of home loans and commercial loans. It helps borrowers in accessing a range of loan products from Australia’s leading lending and financial services institutions. AFG is also involved in the distribution of its own branded home loan products, white label and its established RMBS programme. AFG provides home loan and transactional products via the broker-only channel, which is considered one of Australia’s largest mortgage broking networks.

AFG Details

Long-term Growth Underpinned by Growing Loan Book: Australian Finance Group Ltd (ASX: AFG) is a leading mortgage broking group that helps borrowers in accessing a range of loan products from Australia’s leading lending and financial services institutions. The company has an established and diversified network of brokers across Australia, offering a variety of products. Due to record low-interest rates in Australia, effective government stimulus packages, and an improving consumer outlook, AFG is witnessing increased activities across its business. Notably, AFG brokers have lodged a record $20.6 billion in home loan applications during Q3FY21. Even during COVID-19 lock-downs, AFG brokers and broader industry performed well across the country. In H1FY21, AFG reported 11% YoY growth in revenue, with the AFG securities book growing 18% and residential settlements up by 24% on pcp.

Looking ahead, the company is focused on pursuing further organic or inorganic growth initiatives. Substantial fiscal and monetary stimulus and the government’s policy settings are continuing the support the outlook of AFG. Moreover, the growing loan book of AFG is also proving a stable earnings platform for future years. With a capital light business model, decent cash flow generation, and robust balance sheet, the company is well placed to withstand new funding and economic shocks that may arise.

Five-year Financial Summary (Source: Analysis by Kalkine Group) 

Decent Bottom-line Performance in H1FY21: During H1FY21, AFG Home Loans settlements grew by 17% on pcp and AFG Securities loan book increased by 18% to $2.96 billion. Residential settlements grew by 24% in H1FY21 compared to H1FY20. For H1FY21, the company reported 41% YoY growth in Underlying NPAT to $24.9 million, demonstrating the ongoing success of the earnings diversification strategy. 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)

Key Metris: For H1FY21, the company reported a gross margin of 14.30%, up from 13.70% in H1FY20. Further, the company reported EBITDA margin of 9.80% in H1FY21, up from 8.60% in H1FY20. Net margin for H1FY21 stood at 7.4%, up from 6.2% in H1FY20.

Profitably Metrics (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 38.68% 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:    

Analysis by Kalkine Group

Track Record of Paying Decent Dividends: For 1HFY21, the company has paid an interim dividend of 5.9 cents per share, up by 9% on pcp despite the COVID-19 led uncertainties. It represents that PDL has been focussing on enhancing shareholders’ value. From 2016 to 2020, AFG’s dividend per share has increased at a CAGR of 4.72%. At CMP of $2.710, the company’s annual dividend yield stood at 3.85%. We presume that dividend yield about 7.41% on a 5-year average basis seems to be a decent spot under the current challenging environment.

Divided Track Record (Source: Analysis by Kalkine Group)

Completes Upsized RMBS Transaction: On 6 May 2021, AFG announced that its wholly owned subsidiary, AFG Securities Pty Ltd, has successfully priced an upsized A$750 million Residential Mortgage-Backed Securities (RMBS) issue. The company is now looking forward to delivering a competitive range of home loans to its brokers and their customers and sound investment opportunities to the RMBS market.      

Q3FY21 Update: During Q3FY21, the company’s brokers lodged record $20.6 billion in home loan applications, up by 34.32% on pcp, supported by record low interest rates, effective government stimulus packages and an improving consumer outlook. In Australia, the lodgements in New South Wales grew by 9.37% on last quarter. In Victoria, the lodgements grew by 6.60% on last quarter.

Key Risks: The COVID-19 pandemic has the potential to deteriorate the fundamentals of the housing market of Australia, which could impact the company’s business. AFG operates in sectors that may face increasing levels of competition, including competition from business models using new technology platforms. It should be noted that AFG is currently trading at higher levels, as its current market price is above the average of its 52-week price level range of $1.500 - $3.160.

Outlook: It is expected that the resilient housing market of Australia will help the country in recovering from the disruption of COVID-19 pandemic. The recovery of Australia’s housing market is also helping AFG brokers in lodging increased home loan applications. AFG is committed to its strategy of earning diversification strategy and is focused on pursuing further organic or inorganic growth opportunities. Further, the company expects Government initiatives to continue supporting its residential volumes. AFG is also focused on growing its earning capacity by reaching further into Distribution and Manufacturing margins through AFG Home Loans, AFG Securities, AFG Business and investment in Thinktank. AFG continues to maintain a capital light business model, which allows it to pursue future organic or inorganic opportunities.

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

Source: 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 2.67%. The stock has a 52-week’s low and high of $1.5 and $3.16, respectively. We have valued the 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 that the company can trade at a slight discount to its peer mean P/E (NTM trading multiple), considering the stock’s current trading level, decline in reported P/E ratio in H1FY21, and associated key risks regarding the impact of COVID-19 pandemic while also taking into account the that the company has been trading at a discount in the past 3-years over its peer average. We have taken peers like Westpac Banking Corp (ASX: WBC), Mortgage Choice Ltd (ASX: MOC), and Commonwealth Bank of Australia (ASX: CBA), etc. Considering the company’s decent performance in Q3FY21, growing AFG Securities loan book, ongoing focus on pursuing organic and inorganic growth initiatives, modest long-term outlook, and valuation, we give a “Buy” rating on the stock at the closing price of $2.710, down by 1.455% as on 3 June 2021.

AFG Daily Technical Chart, Data Source: REFINITIV

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

Note 2: 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. 

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.

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