EUR 4.56 For Business Accounts Only

JKSB Quarterly Highlights_Central Finance PLC (CFIN)_1QFY18

CFIN reported a modest 3% YoY increase in earnings for 1QFY18, with growth in net interest income (+10% YoY) and a sharp reduction in impairment charges (-68% YoY) being partially offset by higher tax expenses. CFIN’s gross NPL ratio continued to trend lower during the quarter, as higher vehicle prices and more stringent LTV ratio caps gradually translate to improved asset quality due to higher switching costs for existing vehicle owners (the company has a target gross NPL ratio of 2.9% for FY18 vs. 3.5% in FY17). With the new stringent LTV ratios dampening leasing demand in the new vehicle segment, CFIN has increased focus on other segments such as SME lending (Rs. 5mn - Rs. 15mn ticket size) and working capital based business loans, while leasing disbursements during the year are likely to be largely driven by the registered vehicle segment. The company reported net loan book growth of 2% QoQ for 1QFY18, with leasing & HP +2% QoQ and other loans +4% QoQ. CFIN continued to enjoy a higher-than-peer NIM of >12% during the quarter, supported by 1) access to lower cost funding; and 2) its retail-driven leasing portfolio (average lending rate of 21%-22% currently).

 We maintain our full year earnings projection of Rs. 5.2bn for FY18E, +8.5% YoY, mainly on the back of expected 7%-8% loan book growth for the year coupled with an improved NPL ratio. We expect the planned diversification of CFIN’s loan book during the year to be largely driven by secured loans, given the company’s measured approach to increasing exposure to the unsecured/no collateral SME lending segment. The share has seen a sharp price decline over the last year and, at its current price of Rs. 85.10, trades at a FY18E P/E of 3.5x, and at a P/BV of 0.6x (based on June 2017 NAVPS), at a significant discount to its peer average.