Australian Finance Group Limited

AFG Details

Key Positives:

Increase in ROE (15% in H1FY22 Vs 13.5% in H1FY21), Increase in Net Income ($56.4mn in H1FY22 Vs 44.7mn in H1FY21)

Key Negatives:

Decrease in EBITDA Margin (9.0% in H1FY22 Vs 9.9% in H1FY21), Decrease in Net Margin (6.8% in H1FY22 Vs 7.5% in H1FY21)

Key Investment Risks:

Interest Rate Risk, Market Price Risk, Competition Risk, etc.

AFG Market Position: Australian Finance Group Limited (ASX: AFG) operates a mortgage origination and lending business. The group provides the AFG wholesale mortgage banking service, AFG home loans and other services.

• AFG is the leading player in lending industry as every 1 in 10 mortgages in Australia is written by AFG broker. AFG owns a broker market share of 67% as of Dec 2021, rise from 57% in Dec 2016.
• Reserve Bank of Australia (RBA) started increasing the cash rates, and AFG has historically performed well during the rising interest rate cycle, due to refinancing opportunities (fixed rates to variable).
• During the period of rising interest rate the refinancing increased from 20-30 percent to over 30%. Additionally, the fixed rate mortgage reports up to 40% volume during FY20-22 which is expected to return back to normal 20% level as the cash rate increases, this opportunity equates to $37.6 billion residential settlements that will drive refinancing activity.
• AFG’s business volume increased significantly compared to overall market during the last period of rising interest rate cycle, providing an opportunity for company to grow in current rate increase environment.

Quick Lookback:

Corporate highlights, (Source: Analysis by Kalkine Group)

Key Risks: Company operates in the sector where it is prone to liquidity risk, credit risk and market risk. Company is also exposed to interest rate risk if group was not able to expand its margins during the rising interest environment.  

Outlook: Australian residential and commercial lending market is worth over $600 billion and 1 to 10 mortgage is written by AFG broker this shows the potential of company’s business. Non-banking lenders also provide a significant opportunity as an alternative income source.

Stock Recommendation: The stock is currently trading near its 52-week low of $1.715, offering a decent opportunity for accumulation. The stock has witnessed a slight upside of 0.27% in the past one month. The stock has been valued using a P/E multiple-based illustrative relative valuation and arrived at a target of low double-digit upside (in % terms). The company can trade at a slight premium to its peers considering the low credit risk, financial strength and expected growth, etc. For the purpose of valuation, peers such as Pepper Money Ltd (ASX: PPM), Resimac Group Ltd (ASX: RMC), Westpac Banking Corp (ASX: WBC), and others have been considered. Considering the expected growth in market share, favorable market conditions, current trading levels, expected upside in valuation, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on this stock at the closing market price of $1.835, down by 0.542% as of 9^th June 2022.

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

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 for 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 a 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 price

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