Company Overview: Liberty Financial Group (ASX: LFG) is engaged in the provision of investments in the financial services industry. It offers its services in the areas of specialty lending, insurance brokering, servicing of receivables, underwriting of consumer insurance, to name a few. It operates predominantly in the geographies of Australia and New Zealand.

LFG Details

Decent Performance in FY21 Aided by Expansion in NIM: The company has a diversified portfolio of businesses with average financial assets of ~$12 billion as of 30 June 2021, reflecting an increase of over 4% on 30 June 2020. The residential segment contributed ~71% of the business mix, secured portfolio contributed ~27% of the portfolio mix, and contribution from financial services stood at ~2%.

FY21 Performance Overview:

LFG reported decent performance during the year with continued growth in loan originations and average assets, along with organic growth in revenues.

• It reported total revenues of ~$853 million in FY21, compared to forecasted revenue of ~$838 million. Net revenue during the year stood at ~$600 million, reflecting growth of ~18% on FY20. The growth has been aided by an increase in NIM by 43bps to 3.08%.
• New assets originated during the year grew by ~17% to $4.1 billion.
• There has also been an improvement in the cost to income ratio to 22.8% in FY21, down from a level of 24.7% in FY20.
• Underlying ROA improved by over 70bps to 1.9% during the year when compared to the previous corresponding year.
• The company has reported improved cost of funding, which stood at 2% in H2FY21, down from a level of 2.67% in H2FY20.

Funding Cost Trend (Source: Analysis by Kalkine Group)

Decent Segment Performance:

The company posted decent performance across all the business units.

• It reported average asset growth in 2HFY21 to ~$12.3 billion, compared to ~$11.7 billion in 2HFY20. It has witnessed decent growth in Secured and Financial Services segments during the period.
• It also delivered decent growth in net contribution to ~$182 million in H2FY21, with an increase across all the segments. The net contribution stood at ~$161 million in H1FY21, and ~$102 million in H2FY20.

Top 10 Shareholders: The top 10 shareholders together form around 83.31% of the total shareholding, while the top 4 constitute the maximum holding. Ma (Sherman) and Boyle (James) are holding a maximum stake in the company at 77.45% and 1.33%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:  The Group reported an uplift in net margin performance to 21.7% in FY21, compared to 15.8% in FY20. There has also been an improvement in ROE performance to 17.9% in FY21, from a level of 13.9% in the prior corresponding year. It ended the period with a cash balance of ~$499 million as of 30 June 2021, and a total debt position of ~$12,245 million.

Revenue Profile & Profitability Metrics (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Macro Risk: The Group’s operations are exposed to macro-economic conditions like the impact of ongoing COVID-19 disruption, which can have an impact on its profitability.
• Funding Risk: The profitability of earnings is dependent on the company’s ability to access funding on favorable terms and rates. Any challenges to obtain the same might have an adverse impact on the NIM.
• Financial Risk: It’s line of business also makes it prone to credit risk, liquidity risk, and market risk.

Outlook:  The company is optimistic on its business outlook, with economic indicators supportive of credit growth as vaccination takes pace and the economy gradually re-opens. It plans to continue with its investments in order to enhance the customer experience and retain clients in midst of fierce competition from peers. LFG also plans to launch expanded solutions in the auto finance domain in the near term. As per a recent update, the Group has announced that it will hold its 2021 Annual General Meeting of shareholders on 17 November 2021.

Valuation Methodology: P/BV 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:  The company’s director Sherman Ma has undergone a change of interest in the company and has acquired 188,303 stapled securities at an average price of $6.8749. As per ASX, the stock of LFG is trading at par to its 52-weeks’ low levels of $6.160. The stock of LFG gave a negative return of ~20.99% in the past six months and a negative return of ~11.35% in the past one month. The stock has been valued using a P/BV multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight premium to its Industry median P/BV multiple, considering the resilient performance, new assets originated, improved funding rates, and expected uptick in credit growth. Considering the expected upside in valuation & current trading levels, increase in assets, organic growth in revenues, improvement in cost to income ratio, access to favourable cost of funding and expected credit growth, current trading levels, market volatility, and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $6.16, as on 18 October 2021, 10:31 AM (GMT+10), Sydney, Eastern Australia.

LFG 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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