Company Overview: Liberty Financial Group Limited (ASX: LFG) is a financial services company and is involved in speciality lending, insurance brokering services, insurance underwriting and management of funds in the ANZ region. The Group has raised over $30 billion from domestic and international capital markets and has provided financial assistance to over 500,000 customers.

LFG Details

Upgraded NPATA Guidance on the Back of Improved Performance: The company operates mainly through the segments of Residential Finance, Secured Finance and Financial Services. It has a sustainable business model with diversified revenue streams. Average financial assets stood at ~$12 billion as of 31 December 2020 with Residential unit contributing ~72% of the asset mix, Secured Financing contributing ~26% and contribution of ~2% from the Financial Services segment.

Key Business Metrics:

• LFG reported an increase in the average financial assets to $12 billion as of H1FY21 end, reflecting an increase of over 4% on the prior corresponding period end.
• New assets originated increased by over 11% to $2 billion in H1FY21, compared to the pcp.
• The number of employees stood at 454 as of the H1FY21 end period.

Update on H1FY21 Financial Performance:

• The company delivered total revenue of $433.1 million during the period.
• NIM increased by over 57bps to 3.07%, compared to H1FY20.
• Underlying NPATA improved by over 58% to $117.7 million in H1FY21, compared to $74.3 million in H1FY20.
• There has been a reduction of 300bps in the cost to income ratio to 21.4% during the period, driven by an increase in net revenue compared to expenses.
• Underlying ROA improved by over 70bps to 2%.

The cash position of the company improved to ~$771 million as of 31 December 2020, compared to ~$498 million as of 30 June 2020

Cash & Equivalents Trend (Source: Analysis by Kalkine Group)

Decent Traction Towards Growth:

• The company’s corporate rating has been affirmed BBB- (Stable) by S&P on 27 October 2020 and on 25 November 2020.
• The loans which were previously funded on the balance sheet were moved to secured facilities, thereby increasing free cash.
• LFG has upgraded its forecast FY21 underlying NPATA to be over $220 million before the adjustment to the collective provision for financial asset impairment, compared to previous declared guidance of over $200 million. The upgrade reflects better than expected trading performance.
• It has declared a dividend of 24 cents per share to be paid on 31 August 2021.

Top 10 Shareholders: The top 10 shareholders together form around 82.46% 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 77.38% and 1.33%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The company reported an improvement in the net margin to 19.2% in H1FY21, compared to 17.2% in H1FY20. There has also been improvement in the times interest earned to 2.2x in H1FY21, from a level of 1.6x in the prior corresponding period. Debt-to-equity ratio stood at 12.13x as of 31 December 2020.

Growth Profile and Profitability Metrics (Source: Analysis by Kalkine Group)

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

• Financial Risk: It is prone to credit risk, liquidity risk and market risk from the use of its financial instruments.
• Asset Impairment Risk: The Group is exposed to the given risk and the onset of the COVID-19 pandemic further intensifies the exposure to such assets.
• Funding Risk: LFG’s line of business depends on reasonable funding rates for generating margin income, and any challenge to access these rates might impact the profitability of the company.

Outlook: The company has reported growth in loan originations and average assets and expects continued growth in revenue and earnings going forward. It plans to make a dividend distribution with the pay-out ratio to be between 40% and 80% of underlying NPAT for the H2FY21 period. It has witnessed an increase in its ROA performance and anticipates similar growth in NPATA moving ahead. The company will release its FY21 annual results on 30 August 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: On 29 April 2021, the company has announced that it has established three new securitisations trusts for a total of $2.15 billion. As per ASX, the stock of LFG is trading below its average 52-weeks’ levels of $6.60-$8.350. The stock of LFG gave a positive return of ~2.91% in the past one week and a negative return of ~12.96% in the past six months. 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 some premium to its industry median (Banking Services), considering the upgrade in FY21 underlying NPATA performance, optimistic outlook and stable credit rating for its corporate facilities. Considering the expected upside in valuation & current trading levels, upgrade in guidance for NPATA in FY21, improvement in NIM, cost to income ratio and optimistic outlook, we recommend a ‘Buy’ rating on the stock at the current market price of $6.94, down by ~1% (as on 23 August 2021, 10:27 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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