Company Overview: Australian Finance Group Ltd (ASX: AFG) is a leading mortgage broking group that aids borrowers in accessing a range of load products from Australia’s leading financial and lending services institutions. AFG has an established and diversified network of brokers across Australia, offering a wide range of products.

AFG Details

AFG Rides in Growing Australian Home Loan Market: Despite a challenging period, the company remains on track delivering decent returns via a robust value business model, diversified income streams, and a beneficial core that delivers competition to its peers, choice, and value to Australian borrowers. With a Low-interest rate environment in Australia, improving customer outlook and government stimulus activities, the company remains well equipped to offer value to its brokers, and better returns for shareholders.

Key Findings from 4QFY21 (three months to 30 June 2021)

• Robust Activities for AFG brokers: During the quarter, AFG brokers recorded $22.6 billion in home loan lodgements, depicting a rise of 10% from the period quarter and a whopping increase of 34% on a year over year basis.
• Rise in Record lodgements Across Australia: In 4QFY21, New South Wales recorded lodgements of $7.87 billion, up 12.16% from the previous quarter. Whereas Victoria increased 12.76% QoQ and came in at $7.54 billion. WA, Queensland, and South Australia lodgements continued to show growth with an increase of 5.19%, 5.28%, and 7.27% in 4QFY21, respectively, from 3QFY21.

A resilient housing market in Australia will assist AFG to bounce back from the disruption caused by COVID-19 led outbreak. The recovery in the Australian market is also aiding AFG brokers in lodging increased home loan applications. The company remains focused on enhancing Government-led initiatives to continue supporting its residential volumes.

5-Year Financial Summary (Source: Analysis by Kalkine Group)

1HFY21 Result Highlights:

• Rise in Revenue: AFG reported total revenue of $371.06 million for 1HFY21, up 11% from the prior corresponding period. An increase in top-line can be backed by growing AFG Securities book (up 18% on pcp) and Residential settlements up 24% on pcp.
• Improvement in Underlying NPAT: In 1HFY21, underlying net profit after tax stood at $24.88 million, up 41% year over year, boosted by strong NIM.
• Rise in AFG Home Loan Settlement: During the period, the company witnessed a 17% increase in its Home Loans settlements, owing to favourable mix change towards White Label funders.
• Higher Residential settlements: In 1HFY21, the company’s total residential settlements increased 24% from the prior corresponding period, thanks to robust government stimulus, as well as upgraders and refinance activity.
• Balance Sheet Scenario: The company maintains a strong balance sheet with unrestricted cash, trail book assets, financial assets, and sub-ordinated capital coming to $267 million

Key Metrics: For 1HFY21, AFG reported an EBITDA margin of 9.8%, up from 8.6% in comparable 1HFY20. NPAT margin for 1HFY21 stood at 7.4%, up from the reported figure of 6.2% in 1HFY20.  

Profitability Profile (Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 38.65% 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 6.52% and 6.08%, respectively, as also highlighted in the chart below:     

(Analysis by Kalkine Group)

Dividend Track Record: The company has a decent track record of rewarding shareholders through dividends. Supported by its decent net cash position, strong liquidity, improved cash flow in 4QFY21 and 1HFY21, AFG paid an interim dividend of 5.9 cents per share, representing a rise of 9% on pcp. Notably, dividends as a percentage of underlying NPAT stood at 70% in 1HFY21. The annual dividend yield of AFG is ~7.41% on a five-year average basis (FY16- 20) and current dividend yield trades at ~4.04%. This implies that the company has been delivering decent returns to its shareholders over the last five years. This might help in attracting the attention of dividend-seeking investors.

Dividend History (Source: Analysis by kalkine Group)

Key Update:

• Completion of Upsized RMBS Transaction: AFG’s wholly-owned subsidiary AFG Securities Pty Ltd has recently completed the pricing of an upsized A$750m Residential Mortgage-Backed Securities (RMBS) issue. The upsizing of the transaction from $500 million to $750 million aids the company to assist new and returning investors.

Key Risks:

• COVID-19 Uncertainties: The COVID-19 pandemic could cause a delay in the housing market of Australia, which could impact the company’s financial performance.
• Change in Macro-Economic Scenarios: Changes in economic, political, or societal trends can also impact the company’s performance.
• Stiff Competition: AFG operates in a highly competitive environment, which is subject to business consolidations, new technology up-gradation, and a new business model.  

Outlook: The company remains well placed to embark on the future strategic growth investment for both organic and inorganic prospects. The company’s outlook is supported by substantial fiscal and monetary stimulus, and government policy. Further, the rise in loan book of AFG provides adequate support to its earnings platform, going forward. The company remains well-positioned to come out strong from the global economic uncertainties, given a capital-light business model, decent balance sheet, robust pipeline of lodgements as well as good cash flow generation abilities.

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 corrected by 5.04% and has a 52-week price level band of $1.56 - $3.16. We have valued the stock using the 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 premium to its peer average P/E (NTM trading multiple), considering the improved margins, growth in loan book, and modest long-term outlook. We have taken peers like Westpac Banking Corp (ASX: WBC), Commonwealth Bank of Australia (ASX: CBA), to name a few. Considering the company’s improving top line, its track record of rewarding shareholders through dividends, decent performance in 4QFY21, pursuing organic as well as inorganic growth prospects, and valuation, we give a “Buy’ recommendation on the stock at the current market price of $2.63, (as on 21 July 2021, 1:30 PM (GMT+10), Sydney, Eastern Australia).

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

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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