Company Overview: Australian Finance Group Ltd (ASX: AFG) is 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. AFG brokers have access to a wide range of products to help them better meet the financial needs and goals of commercial and business borrowers. The company was listed on ASX on 22 May 2015.

AFG Details

2021 AGM Highlights: On 26 November 2021, AFG held its 2021 Annual General Meeting (AGM), wherein, the management highlighted that in the first three months of FY22, the company has lodged $24 billion in home loan finance, which is 33% higher than the previous corresponding period (pcp). The management also highlighted that despite facing lockdowns and restrictions, the company witnessed positive growth in residential volumes in all states. Some of the other key points highlighted at the AGM were as follows:

• FY21 Result Highlights: For FY21, AFG reported 28% YoY growth in residential settlements, and 8% YoY growth in Residential and Commercial trail book, driven by record demand for the services of the company’s network of brokers. Reported NPAT for FY21 stood at $51.3 million, up 35% on FY20, supported by growth in revenue and loan book.
• AFG Securities Update: The company’s overall lodgements have increased to a record $388 million as of October 2021.
• Warehouse Update: AFG has executed a 3rd warehouse with a 2-year tenure, and its largest warehouse has been extended to December 2022, providing certainty of funding.
• Robust Balance Sheet: As at 30 June 2021, the company had unrestricted cash, net trail book and investments of $282.12 million.

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

Key Metrics: 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. Asset turnover ratio for FY21 stood at 0.16x, down from 0.17x. 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 43.41% of the total shareholding, while the top four constitutes the maximum holding. Challenger Managed Investments Ltd. and Lennox Capital Partners Pty Ltd. are holding a maximum stake in the company at 6.28%, and 6.28%, respectively, as also highlighted in the chart below:

(Source: Analysis by Kalkine Group)

Dividend History: AFG has a track record of paying a decent dividend to its shareholders. From 2017 to 2021, the company’s total dividend increased at a CAGR of ~8.21%, demonstrating its focus on rewarding the shareholders via dividends. For H2FY21, AFG has paid a final dividend of 7.4 cents per share, taking the total full year dividend to 13.3 cents per share, up 32% on the previous year. Notably, the total dividend represented 80% of underlying profit excluding share of profit of associates. At CMP of $2.58, the company’s annual dividend yield stood at ~5.15%.

Dividend Trend (Source: Analysis by Kalkine Group)

Completed Acquisition of National Finance Alliance Pty Ltd: On 22 December 2021, AFG confirmed that it has completed the acquisition of a 75% stake in National Finance Alliance Pty Ltd, which is a leading asset finance aggregator. This acquisition is in line with AFG’s goal of growing distribution and investing in manufacturing capability across multiple asset classes. Notably, the combined group now has over 3,335 brokers.

New Director Appointment: On 10 December 2021, AFG notified that it has expanded its board with the appointment of Ms. Annette King as an independent Non-Executive Director. Ms. Annette King has extensive experience in leadership roles for large multinational companies and she brings to the board a deep financial acumen and understanding of the business drivers behind growth.

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: Looking ahead, the company is focused on expanding opportunities for distribution and high margin securitisation lending through investments. The company expects a change in product mix together with recent warehouse changes will provide Net Interest Margin (NIM) protection. The recent 75% acquisition of National Finance Alliance Pty Ltd is expected to expand AFG’s existing footprint in the Australian asset finance market and will provide exposure to the retail asset finance market through Fintelligence’s retail broking business, Broli. With resilient business model, the company seems well-positioned to continue to support its customers, its broker network and its lending partners.

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 ~10.03% 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 decent demand for the services of the company’s network of brokers, expected benefits of recent 75% acquisition of National Finance Alliance Pty Ltd, 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), have been considered. Considering the AFG’s improved Q1FY22 performance, decent FY21 results, track record of paying decent dividend, modest long-term outlook, current trading levels and valuation, we give a “Buy’ rating on the stock at the current market price of $2.58 as on 23 December 2021, 12:30 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.

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