Company Overview: Liberty Financial Group (ASX: LFG) provides diversified financial services, which include specialty lending, finance and insurance brokering, receivables servicing, consumer insurance underwriting, real estate and funds management across Australia and New Zealand. During FY21, the company’s residential lending business contributed ~71%, secured finance business contributed ~27% and ~2% was from financial services business of the total portfolio of $12.4 billion. The company has raised over $33 billion in domestic and international capital markets and helped over 600,000 customers get financial assistance, since 1997.

LFG Details

Diversified Business Model Supported Growth in FY21: The company operates a durable business model, supported by advanced risk-management capabilities, decent S&P service rating throughout all asset classes and diversified products, services, revenues, and profits. The company’s actual performance in FY21 has surpassed all the IPO forecasts in each of its operational and financial value drivers, evident by the average earning assets of $12.0 billion against the expected figure of $11.9 billion.

FY21 Financial and Operational Highlights:

• Backed by the growth of 43 basis points in Net Interest Margin (NIM) to 3.08%, the company’s net revenue soared by 18% to $600 million.
• The company recorded ongoing growth in loan originations and average assets with new loan originations of $4.1 billion, reflecting a growth of 17% as borrowers sought funding to improve their liquidity position.
• The company witnessed improvement in cost-to-income ratio to 22.8%, reflecting a fall of 190 bps and its underlying return on assets was increased to 1.9%, up by 70bps.
• As announced on 23 November 2021, the company declared an unfranked trust distribution of 21 cps for the period 1 July 2021 to 30 November 2021, which will be paid on 15 December 2021.

Cost-to-Income Ratio (Source: Analysis by Kalkine Group)

Q1FY22 Business Highlights:

• During the quarter, the company has witnessed rising discharges and amortization, which indicates the fiercely competitive developments in the lending markets.
• New loan originations are on track to surpass the level achieved in FY21, with $1.38 billion of loans originated during the quarter. In addition, the company witnessed continued growth in the secured and personal loan portfolio.
• The company had two new ABS issues during the quarter, raising a total of $1.6 billion of capital, and thus maintaining its decent capital and liquidity position.

Top 10 Shareholders: The top 10 shareholders together form around 83.20% 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: During FY21, the company witnessed a rise in net margin to 21.7% as compared to 15.8% in FY20. In addition, return on equity for the year rose to 17.9% against 13.9% in FY20.

Revenue and Margin Profile (Source: Analysis by Kalkine Group)

Key Risks:

• Liquidity and Funding Risk: The company operates a business model, which requires an ample flow of funding; any disruptions in the flow of funding could impact the operational health of the business.
• Regulatory Risk: LFG is exposed to a more complex regulatory environment; any failure in the compliances could lead the business to fines, penalties, etc.

Outlook: The management seems to be optimistic about its outlook in FY22 and believes that the economic indicators are supportive of credit growth. In addition, the company expects improving borrowing cost to support growth in net interest margin, moving ahead. Looking forward, the company is planning to roll out expanded auto finance solutions, which supports its strategy of a diversified portfolio mix. The company would also continue to invest in improving customer experience through digital and online technologies. LFG will look to drive profitability growth via execution on its strategy of consistently and sustainably improving its three disciplines: Customer Experience, Customer Choice and Risk Adjusted -Returns.

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: For FY22, LFG expects to maintain a distribution payout of in the range of 40%-80% of NPAT. The stock of LFG has been corrected by 18.76% and 23.99% in the past three and six months, respectively. The stock is trading below its 52-week low-high average of $5.470 - $8.350. 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 peers’ average multiple, considering the reduced borrowing cost, expected growth in NIM and favorable economic indicators, etc. Considering the expected upside in valuation & current trading levels, diversified business model, reducing borrowing cost, optimistic outlook, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $5.670, down by ~0.527% as on 06 December 2021.

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 Valuation has been achieved and is 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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