Company Overview: Australian Finance Group Ltd (ASX: AFG) is engaged in distributing its own branded home loan products. It offers mortgage brokerage, insurance, personal loans, and commercial finance services. AFG has two key reportable segments, namely (1) Aggregation and (2) AFG Home Loans. The company was listed on ASX on 22 May 2015.

AFG Details

AFG Rides on Decent Fundamentals & Diversification: The company is one of Australia’s largest residential mortgage aggregators, which has delivered robust growth in profitability and shareholder returns via effectively growing into higher-margin lending services. Despite the COVID-19 led uncertainties, AFG rides on a robust value business model, and diversified income streams. The company remains well equipped to offer value to its brokers, and improved returns for shareholders, thanks to an improving customer outlook and government stimulus activities.

3QFY22 Highlights (Analysis by Kalkine Group)

Key Takeaways from 1HFY22 Result:

• Impressive Top-Line Growth: AFG reported total revenue of $481.23 million for 1HFY22, up 31% from the prior corresponding period, owing to higher settlements and growing loan books across product classes.
• Rise in NPAT: Reported NPAT increased by ~20% on a year over year basis to ~$30 million in 1HFY22, depicting the successful implementation of AFG’s diversification strategy across th asset classes and business lines. In 1HFY22, underlying net profit after tax stood at $25.96 million, up 4% year over year.
• Other Operational Highlights: Residential settlements in 1HFY22 increased a whopping 47% from the prior period, with revenue from the aggregation segment depicting a rise of 35% on pcp. The AFG Securities loan book and AFG Home Loans white label settlements increased 36.1% and 46% from the prior period, respectively.
• Liquidity Highlight: As at 31 December 2021, the company had unrestricted cash, net trail book and investments of $225.08 million. AFG exited the period with a cash balance of $245 million, up from $191.12 million as at 31 December 2020. Net cash flows from operating activities stood at $14,895k in 1HFY22, compared to $25,788k in 1HFY21, owing to a reversal of a robust positive working capital movement in June 2021.

AFG invested in its technology and acquired Fintelligence and its proprietary platform to optimise growth avenues and enhance the scale of broker networks across multiple asset classes. Notably, the combined group now has over 3,525 brokers.

Acquisition Highlights (Analysis by Kalkine Group)

Key Metrics: For 1HFY22, AFG reported an ROE of 15%, up from the year-ago figure of 13.5%. Asset turnover ratio for 1HFY22 stood at 0.09x, up from 0.08x in 1HFY21.

Profitability Profile (Analysis by Kalkine Group)

Top 10 Shareholders:

The top 10 shareholders together form around 43.51% of the total shareholding, while the top four constitute the maximum holding. Lennox Capital Partners Pty Ltd. and Challenger Managed Investments Ltd. are holding a maximum stake in the company at 6.28%, each, respectively, as also highlighted in the chart below:

(Analysis by Kalkine Group)

Dividend History: AFG has a track record of paying a decent dividend to its shareholders. For 1HFY22, AFG has paid an interim dividend of 7 cents per share, up 19% on the previous year, generating an annualised yield of ~6%. At CMP of $1.98, the company’s annual dividend yield stood at ~7.38%. 

Dividend Highlight (Source: Analysis by kalkine Group)

Key Risks:  

• The company is exposed to risks associated with fluctuations in foreign exchange rates, interest rates and equity prices, which may impact its income, and the value of its holdings of financial instruments.
• The uncertainties surrounding the COVID-19 pandemic could impact the lending markets, which may affect the company’s outlook.
• AFG operates in a highly competitive environment, which is subject to business consolidations, new technology up-gradation, and a new business model

Outlook: A resilient housing market in Australia is expected to aid AFG in bouncing back from the disruption triggered by COVID-19 led outbreak. The company remains focused on enhancing Government-led initiatives to continue supporting its residential volumes. AFG is optimistic about the prospects of the residential mortgage market and the opportunity received with the acquisition of Fintelligence. The company plans to improve the broker and customer proposition as it is pivotal to its growth plan. Given a capital-light business model, robust pipeline of lodgements, decent balance sheet, and good cash flow generation abilities, the company remains well-positioned to come out strong from the global economic uncertainties.

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 six months, the stock has corrected by ~23.37% and is trading lower than the average 52-week price level band of $1.775 - $3.08, offering a decent opportunity for accumulation. The stock has been valued 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). The company might trade at a slight discount to its peers, considering the COVID-19 uncertainties, uptick in the debt-to-equity ratio, integration risk, and disruption in the supply chain, etc. For this purpose, peers like Bank of Queensland Ltd (ASX: BOQ), Australia and New Zealand Banking Group Ltd (ASX: ANZ), Commonwealth Bank of Australia (ASX: CBA), and others have been considered. Considering the company’s track record of rewarding shareholders through dividends, decent earnings profile, a growing loan book, decent long-term outlook, current trading level, indicative upside in the valuation, and key risks associated with the business, we give a “Speculative Buy’ recommendation on the stock at the closing market price of $1.98, up by ~1.538% as of 5 May 2022.

Markets are trading in a highly volatile zone currently due to certain macro-economic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.

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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