Softlogic Finance (CRL) as one of the fast growing finance companies in Sri
Lanka is expected to achieve a 101% earnings growth amidst changing focus
on credit disbursement portfolio to high yielding segments, lowering
impairment stemming from leases and higher purchases and increasing
presence of branch network. We expect CRL to achieve an EPS of LKR 9.0 in
FY16E leading to a PER of 4.4x and PBV of 1.0x compared to sector average of
11.2x and 1.6x respectively. FC Research expects a total return of c.58% by
FY16E, based on a target price of LKR 65.0 (+54%) and a dividend yield of 3.6%.
Changing clientele may generate 32% growth in NII in FY16E: CRL has been
changing its product mix and focus from leases and hire purchases to Micro
finance in order to capture high yielding niche market segments by developing
innovative products. Hence, we expect net interest income to grow by 32% to
LKR 2bn in FY16E attributing to high yielding loans and advances growth of 25%
to LKR 11.5bn in FY16E. Further, we maintain our conservative forecast for
leases and hire purchases growth at 17% to LKR 8bn.
Efficient cost management and lowering impairment may drive +101% profit
growth in FY16E: We expect CRL’s to lower impairment compared to FY15 due
declined exposure in leases and hire purchase portfolio. Further, strategic
branch expansion and cost management measures are expected to improve
CRL’s cost-to-core-income ratio to 63% in FY16E from 67% in FY15E.
CRL may provide a total 1-year return of 58%: CRL at LKR 40.0, trades on a FY16E
PER of 4.4x and PBV of 1.0x. The counter may also provide a DPS of LKR 1.5 for
FY15E and LKR 3.1 for FY16E, which may translate into a dividend yield of 3.8%
and 7.6% respectively. On justified book value CRL is valued at LKR 58.0 while on
8.0x FY16E average PER the company is valued at LKR 72.0. On average we
provide a target price of LKR 65.0 for CRL for a 1-Year period providing a total
return of 58% - BUY.
Please find the attached Report