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COCR Corporate Update- STRONG BUY - 31 03 17 - FC Research
Corporate Update - STRONG BUY
Current Price: LKR 41.0 Fair Value: LKR 58.0
“Entering the Big Leagues”
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COCR, is the 7th largest company in the Non-Bank Financial sector in terms of asset base with total assets of LKR 72.5Bn as at FY16. Earnings recorded a CAGR of 37% over a period from FY12-16 on the back of aggressive growth in lending and improved cost to income ratio which was registered at 44% in FY16. We expect COCR earnings to reach c.LKR 3.1Bn in FY18E. COCR at fair value of LKR 58.0 for FY18E is expected to provide total return of 51% at current price level of LKR 41.0. STRONG BUY
Margins and Spreads to marginally shrink: COCR’s Net Interest Margins are expected to record at c.16% in FY18E as opposed to 17.8% recorded in FY16 on the back of growing lease and hire purchase portfolio which recorded a CAGR of 75% over FY14-16 in comparison to 41% CAGR recorded in loan portfolio for the same period. Interest Spreads are expected to register at c.14.5% in FY18E as opposed to 16.3% recorded in FY16.
Lower Impairment provisioning: Impairment provision as a percentage of total lending portfolio is expected to decline to c.3.6% in FY18E in comparison to 4.7% registered in FY16 backed by the COCR’s effective credit management strategies and effects of newly imposed Loan to Value (LTV) regulations coupled with the increase in value of vehicles resultant to the increase in duty structure.
COCR to provide a 51% return over 12-months period: FC Research expect COCR.N to achieve a fair value of LKR 58.0 providing a total return of 51% (Dividend yield 10%) over 12-month period. [Justified PBV based LKR 67.4, Residual income based LKR 55.3 and PER based LKR 52.0] at the current price levels of LKR 41.0.
Risks associated: Given COCR is into the business of finance, company is exposed to credit, market and regulatory risks.
Disclosure on Shareholding:
First Capital Group or its affiliates do not hold shares in COCR. Neither First Capital Group nor its affiliates have traded in the shares in the three trading days prior to this document, and will not trade in the shares for three trading days following the issue of this document.