Capital Alliance Plc the Biggest Where Size Matters

8/3/2019 Capital Alliance Plc the Biggest Where Size Matters

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Peoples Leasing CompanyTheBIGGEST!Where size matters

CAL ResearchOctober 2011 See p. 30 for important disclaimers

Recommendation

BUY

FY12 Target price

Rs. 25.00

Issue price

Rs. 18.00

No. of shares offered

390,000,040

Amount to be raised

Rs. 7,020 m

Issue opening date

03-Nov-11

0

50

100

150

200

2009 2010 2011 2012E 2013E 2014EPLCg

rouptotalassetsRs.

billion


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Contents

2

I. Leasing and hire purchase sector primedfor explosive growth on vehicle boom

II. Dominating the leasing and HP market,PLC is poised to prosper

III. 2012 forecasts suggest a 40% upside toIPO price

IV. Appendices

Page

5

10

22

27


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IPO price of Rs.18 per share represents 7.2x PER and 1.4xPBV on FY12 forecasts

3

Figure 1: PLC group earnings 2010-14E

Source: CAL Research estimatesSource: Peoples Leasing Company Annual Reports

YEAR END 31 MARCH 2010 2011 2012E 2013E 2014E

Net Interest Income (Rs.mn) 3,454 5,014 8,422 12,475 15,475

Net Profit (Rs.mn) 1,153 2,605 4,538 5,012 6,606

Recurring Net Profit (Rs.mn) 1,153 2,149 3,308 4,848 6,450

Adjusted EPS* 0.78 1.84 2.48 3.11 4.13YoY EPS Growth 18% 135% 35% 25% 33%

PER (x)* 23.0 9.8 7.2 5.8 4.4

PBV (x)* 4.5 3.3 1.4 1.2 1.0

Growth in Lending 27% 95% 77% 38% 23%

Return on Avg. Equity 20% 36% 32% 23% 26%Total shares prior to IPO (mn) : 1,170

Share issued to the public (mn) : 390

Total shares after IPO (mn) : 1,560

*Forecast sha re capital consi st of the total sha res includi ng the s hares i ss ued for IPO


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Recommendation: BUY, FY12 target price - Rs.25/-

Led by a forecast 81% increase in vehicle numbers, the leasing andhire purchase industry is likely to grow c.6x by 2018.

Dominating the leasing and HP sector at nearly twice the size of itsclosest peer, PLCs group assets are likely to grow c.3x by 2014,

resulting in a recurring earnings Cagr of 44% FY2012-14E, includinga c.54% growth in recurring earnings by FY12.

Given our 2012 forecasts, to be comparable to peers PLC shouldtrade at c.Rs.25/- per share (2x FY12E book-value and 10.8x FY12Eearnings), up 40% from the IPO price

4


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I. Leasing and hire purchase sectorprimed for explosive growth onvehicle boom

5


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Post-war Sri Lankas real GDP per capita could grow fromUS$2,400 today to US$3,900 by 2018

6

Figure 2: Forecast real GDP per capita (US$)

US$2,400

US$3,900

-

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

GDPperCapita(CurrentUS

$)

Actual Forecast

Estimated realGDP growth at:2011 = 8.0%2012 = 7.6%2013+ = 6.9%

Source: CAL Research estimatesSource: Frontier Research


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Sri Lankas current GDP per capita suggests accelerated

vehicle ownership growth if past trends hold true

Historically, US$1,000-5,000 GDP per capita drives vehicle growth of up to 2xGDP. SLs US$2,400 GDP per capita suggests vehicle growth of 1.3xGDP, or +8% p.a.

7

Source: Vehicle Ownership and Income Growth, Worldwide: 1960-2030, Joyce Dargay, DermotGately and Martin Sommer, Energy Journal, 2007, Vol. 28, No. 4

Figure 3: Long-run income elasticity of vehicle ownership


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800k rise in vehicle sales since 2009 due to reduced importduties and lower interest rates further illustrates demand

8

Figure 5: New vehicle registrations, SriLanka, 2006-2011 (July)

150,000

200,000

250,000

300,000

350,000

400,000

450,000

500,000

2006 2007 2008 2009 2010 1H 2011

From June

2010, excisetax on motorvehicles wasreduced byapprox 50%

From April 2011,excise duty onpetrol vehicleswas increased by

38-43% andhybrid cars wereassigned a dutybetween 8-100%

7

9

11

13

15

17

19

21

Avera

geweightedprimelendingra

te(%)

Figure 4: Average weighted primelending rate (weekly)

Source: Central Bank of Sri LankaSource: Department of Motor Traffic


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An expected 81% growth in vehicle numbers could deliver ac.6 fold increase in the leasing and HP sector by 2018,mainly due to increasing values and refinancing

We believe vehicle population will grow 81% by 2018 (8% Cagr 2011-18E) Vehicle growth is expected to lead the leasing and HP sector to a six-fold increase, which

translates to a 25% Cagr 2011-18E. Historical trends suggest that 50% of all new vehicleregistrations go through leases (83% of new buses & lorries are leased)

9

0

1

2

3

4

5

6

7

8

2010 2018Numberof

vehicles(million)

Others Motorcycles Motor cars

4.0 mn

7.2 mn

Motor cars Motorcycles Others

2010 2018 est.

US$11.2 bn

US$1.9 bn

(Rs.1,236 bn)

(Rs.213 bn)

Figure 7: Leasing and HP forecastFigure 6: Vehicle forecast

Source: CAL Research estimates


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II. Dominating the leasing and HP market,PLC is poised to prosper

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11

Figure 8: Leasing and HP asset base of the largest players in the industry, 2011

PLC accounts for nearly twice the leasing and HP assets ofits closest competitor

0

10

20

30

40

50

60

PLC LOLC LFIN CFIN

Lease&hirepurchaseassetsR

s.

billion

Source: Annual Reports of the companies


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12

Figure 9: Vehicle mix of leasing and hire purchase advances, 2011

Lorries34%

Buses32%

MotorCars24%

Dual

Purpose9%

Bikes &Three

Wheelers DualPurpose

27%

Lorries26%

MotorCars22%

Buses20%

Bikes &

ThreeWheelers

Leasing Advances Hire Purchase Advances

75% of leasing advances and 73% of hire purchase advances as of 31 March 2011 have beenextended to income-generating vehicles (lorries, buses and dual purpose vehicles).

Funding a diversified set of income-generating vehiclesreduces PLCs concentration risk and allows it to capitalise

on economic prosperity

Source: Peoples Leasing Company Annual Reports


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PLC is well positioned to take advantage of growth in thesector and increase its assets by c.3 fold through FY14

13

Figure 10: PLCs total assets, 20092014E


0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

0

20

40

60

80

100

120

140

160

180

200

2009 2010 2011 2012E 2013E 2014E

TotalAssetsRs.

billion

Asset Base Asset Growth


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14

A large asset base and a credit rating of A allows PLC to

source funds lower than its peers...

Figure 11: Decline in cost of funding among RFCs and SLCs

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10

20

30

40

50

60

70

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

BB- BB A- BBB+ BBB- BBB BBB+ BBB BBB- A A- BBB+ A+ A

TotalAssetsRs.

billion

Averagecostoffunding(%)

Total assets Avg cost of funding Linear (Avg cost of funding)

People's Leasing Finance(Subsidiary of People's Leasing)

People's Leasing Company



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...which enables the company to maintain margins whilstincreasing its asset base

From 2009 to 2011, PLCs Net Interest Margin ranged between c. 11-13% due to favourableinterest rate movements. We expect margins to hold at a respectable 9-10% from 2012 to 2014.

15

Figure 12: Net profit against net interest spread & net interest margin, 200914E


4%

5%

6%

7%

8%

9%

10%

11%

12%

13%

14%

0

1

2

3

4

5

6

7

2009 2010 2011 2012E 2013E 2014E

NetProfitRs.

billion

Net Profit Net Interest Spread Net Interest Margin


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NPL ratio of 1.2% (lowest among peers) illustrates PLCs

capability to grow assets whilst maintaining superior assetquality

16

Figure 13: NPL peer comparison

0%

1%

2%

3%

4%

5%

6%

-

10

20

30

40

50

60

70

CDB MERC LOFC LFIN CFIN PLC

NPL(%)

TotalAssetsRs.

billion

Total assets NPL



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PLCs mutually beneficial relationship with its parent,

Peoples Bank (PB), is likely to allow PLC to leverage off

PBs countrywide branch network for the foreseeable future

PLC is a 95% owned subsidiary of Peoples Bank (Post-IPO: 72%).

PLCs asset base is 10% of PBs asset base, but it contributes 30% of PBs profits.

17

Figure 14: PLCs window offices as a

proportion of PBs branches

51 63

124

200

0

50

100

150

200

250

300

350

2009 2010 2011 2012E

No.o

fBranches/WindowOffices

People's Bank branches

People's Leasing Company window offices

5% 6%

10%

84%

86%

88%

90%

92%

94%

96%

98%

100%

2009 2010 2011

%

ofPeople'sBankTotalAsse

ts

People's Leasing Company People's Bank

Figure 15: PLCs total assets as a

proportion of PBs total assets

Source: Peoples Bank Annual ReportsSource: Peoples Leasing Company Annual Reports


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Expanding branches and window offices beyond theWestern province is likely to further help sustain low NPLs

Interest income has gradually shifted from the high-NPL Western province to the rest of thecountry, from 61% in 2009 to 55% in 2011.

Substantial growth in window branches outside the West is likely to see future NPLs at the 2%level or below.

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Figure 16: NPL by province, March2011

Province NPL RatioCentral 0.66%

Eastern 0.37%

Northern 0.38%

North Central 0.86%

North Western 0.74%

Sabaragamuwa 0.82%Southern 1.05%

Uva 0.43%

Western 1.63%

Company 1.21%

Figure 17: Asset base against NPL, 20092014E

Source: CAL Research estimatesSource: Peoples Leasing Company Annual Reports

0%

1%

2%

3%

4%

0

50

100

150

200

250

2009 2010 2011 2012E 2013E 2014E

TotalAssetsRs.

billion

Asset Base NPL Ratio


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Window offices in Peoples Bank (PB) branches ensure the

lowest cost-to-income ratio compared to peers

PB is Sri Lankas second-largest bank in terms of asset base (Rs.619 bn) and has the biggestbranch network, with 330 branches and 358 service centers.

PLC has managed to open 121 window offices within PB branches, on top of its 37-branchnetwork, and intends to increase window offices to over 200 in 2012.

As a result, PLCs cost-to-income ratio is well below its peer group.

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Figure 18: Cost-to-income ratio peercomparison

Figure 19: PLC cost-to-income ratio

0%

10%

20%

30%

40%

50%

60%

CDB MERC LOFC LFIN CFIN PLC

Costt

oIncome(%)

29.0%

29.5%

30.0%

30.5%

31.0%

2009 2010 2011

Source: Annual Reports of the companiesSource: Peoples Leasing Company Annual Reports


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High brand recognition coupled with expanding branch andwindow office network will make PLC a household name.

Parent company Peoples Bank ranks #2 in the top 100 brands in Sri Lanka

20

Figure 20: Finance & leasing companies in the top 100 most valuable brands in SriLanka (2011) against the number of branches*

Source: Brand Finance, 2011

CFIN

PLC

LFIN

0

10

20

30

40

50

60

70

80

90

100

0 10 20 30 40 50 60

Top100Rank,

2011

Number of Branches*

LOFC

* Number of branches excludes service centres/kiosks, with bubble sizes scaled to assets


- Size of bubble indicates size of company based on total assets


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A high-growth industry, the backing of a large parent, andproven management capability should give PLC animpressive 44% 2012-14E earnings Cagr

21

Figure 21: Earnings growth, 2009-11 historical and 2012-14 forecast

Source: Peoples Leasing Company Annual ReportsSource: CAL Research estimates

0%

20%

40%

60%

80%

100%

120%

140%

0

2

4

6

8

10

12

14

16

18

2009 2010 2011 2012E 2013E 2014E

Growth(%)

Rs.

billion

Net Interest Income Net Profit Net Interest Income Growth Net Profit Growth


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III. FY12 forecasts suggest a 40% upsideto IPO price

22


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PLC has the best combination of trailing PBV (2.5x) andROE (35%) compared to the closest peers

23

Figure 22: Return on equity against price to book value*, 2011

*Price to Book Value - prices at 12.10.2011

** Adjusted for an extraordinary item

PLC

CFIN

LFIN

LOFC**

0%

10%

20%

30%

40%

50%

60%

0 1 2 3 4 5 6 7 8 9 10

ReturnonEquity(%)

Price/ Book Value*

Source: Annual Reports of the companies- Size of bubble indicates size of company based on total assets


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24

...and the lowest forward PER (7.2x) and PBV (1.4x) vs. mostlarge RFCs and commercial banks

Figure 23: Comparative multiples in the Banking and Finance sector


NTB

LFINLFIN

NTB

Source: CAL Research/consensus estimates

COMB

CFIN

HNB

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

6 7 8 9 10 11 12 13

PBV

PER

Current year forecasts PER(x) PBV(x)

Mar 2012E or Dec 2011E

PLC 7.2 1.4

NTB 9.0 1.4

LFIN 7.2 3.1

COMB 10.7 2.1

CFIN 11.9 2.5

HNB 12.0 1.7

PLC

- Size of bubble indicates the attractiveness of the valuations (1/(PER*PBV))


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Therefore, we believe PLC should trade at c.Rs. 25 per share(2x FY12E PBV and 10.8x FY12E PER)

25

Figure 24: CAL Research forecast for PLC group


YEAR END 31 MARCH 2010 2011 2012E 2013E 2014E

Net Interest Income (Rs.mn) 3,454 5,014 8,422 12,475 15,475

Net Profit (Rs.mn) 1,153 2,605 4,538 5,012 6,606

Recurring Net Profit (Rs.mn) 1,153 2,149 3,308 4,848 6,450Adjusted EPS* 0.78 1.84 2.48 3.11 4.13

YoY EPS Growth 18% 135% 35% 25% 33%

PER (x)* 23.0 9.8 7.2 5.8 4.4

PBV (x)* 4.5 3.3 1.4 1.2 1.0Growth in Lending 27% 95% 77% 38% 23%

Return on Avg. Equity 20% 36% 32% 23% 26%

*Forecas t sha re capital consi st of the total sha res includi ng the s hares i ss ued for IPO


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Other key ratios

26

Figure 25: Key forecast ratios for PLC group


YEAR END 31 MARCH 2011 2012E 2013E 2014E

Return on Average Equity 36% 32% 23% 26%

Return on Average Assets 5.4% 5.1% 3.7% 3.8%

Net Interest Spread 8.8% 8.1% 7.5% 7.0%Net Interest Margin 11.4% 10.4% 10.1% 9.7%

Deposit Growth 179% 70% 40% 25%

Borrowings Growth 107% 70% 40% 25%

Net Lending Growth 95% 77% 38% 23%NPL Ratio 1% 1% 2% 2%

Cost / Income 29% 31% 31% 32%

Gross Lending / (Deposits+Borrowing) 126% 128% 128% 126%


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IV. Appendices

27

A. Income Statement

B. Balance Sheet


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Appendix A: Income Statement

28

Figure 26: Income Statement PLC group


Profit & Loss Statement

Period Ending 31 March 2009 2010 2011 2012E 2013E 2014E

Gross Income 6,527 7,428 9,986 15,903 24,104 31,015

Interest Income 5,744 6,776 8,916 14,841 22,635 29,841

Less : Interest Expenses 3,339 3,323 3,902 6,419 10,161 14,366

Net Interest Income 2,405 3,454 5,014 8,422 12,475 15,475

Non-Interest Income 783 652 1,071 1,062 1,469 1,175

Net Income 3,188 4,105 6,084 9,484 13,943 16,650

Less : Non-Interest Expenses 981 1,232 1,788 2,905 4,303 5,328Operating Profit before Provisioning 2,207 2,873 4,296 6,579 9,640 11,322

Less : Loan loss Provisioning 55 540 52 -913 1,704 716

Operating Profit before Taxes 2,151 2,333 4,244 7,492 7,936 10,606

Less : VAT 270 275 401 786 654 996

Operating Profit before Corporate Tax 1,882 2,058 3,843 6,706 7,282 9,610

Less : Corporate Tax 843 906 1,231 2,146 2,330 3,075

Investment fund income 0 0 0 0 85 104

Profit for the Period for Group 1,039 1,152 2,612 4,560 5,037 6,639

Minority Interest 0 0 7 23 25 33

Profit attributable to Equity Holders 1,039 1,153 2,605 4,538 5,012 6,606

Recurring Profit for the Period 1,039 1,153 2,149 3,308 4,848 6,450

Recurring EPS 0.82 0.78 1.84 2.48 3.11 4.13


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Appendix B: Balance Sheet

29

Figure 27: Balance Sheet PLC group


Balance Sheet

Period Ending 31 March 2009 2010 2011 2012E 2013E 2014E

Assets

Cash and short term securities 1,704 2,469 3,323 9,125 12,083 16,371

Inventories 163 45 269 269 269 269

Net Loans and Advances 1,063 1,770 3,345 6,000 8,332 10,242

Net Leases 21,471 26,739 52,284 92,288 127,469 156,680

Property, Plant & Equipment 628 980 1,624 2,457 3,395 4,173

Other Assets 509 887 3,006 3,315 3,119 3,781

25,538 32,890 63,852 113,455 154,667 191,517

Equity and Liabilities

Liabilities

Deposits 0 1,667 4,647 7,900 11,060 13,825

Borrowings 17,132 20,370 42,088 71,549 100,169 125,211

Other Liabilities 2,968 4,674 8,634 14,214 19,616 24,343

20,099 26,711 55,369 93,663 130,845 163,380

Shareholders Funds

Stated Capital 1,850 1,850 1,850 12,758 12,758 12,758

Statutory Reserve Fund 166 226 376 604 856 1,188Total Other Reserves 3,423 4,098 6,086 6,307 10,060 14,010

5,439 6,173 8,383 19,670 23,674 27,956

Minority Interest 0 6 100 123 148 181

5,439 6,179 8,482 19,792 23,822 28,137

Total Liabilities & Shareholders' Funds 25,538 32,890 63,852 113,455 154,667 191,517

NAVPS 4.65 5.28 3.35 12.61 15.18 17.92


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DisclaimerThis document has been prepared and issued on the basis of publicly available information, internally developeddata and other sources, believed to be reliable. Capital Alliance Securities (Private) Limited however does notwarrant its completeness or accuracy. Opinions and estimates given constitute a judgment as of the date of thematerial and are subject to change without notice. This report is not intended as an offer or solicitation for thepurchase or sale of any financial instrument. The recipient of this report must make their own independentdecision regarding any securities, investments or financial instruments mentioned herein. Securities or financialinstruments mentioned may not be suitable to all investors. Capital Alliance Securities (Private) Limited its

directors, officers, consultants, employees, outsourced research providers associates or business partner, willnot be responsible, for any claims damages, compensation, suits, damages, loss, costs, charges, expenses,outgoing or payments including attorneys fees which recipients of the reports suffers or incurs directly or

indirectly arising out actions taken as a result of this report. This report is for the use of the intended recipientonly. Access, disclosure, copying, distribution or reliance on any of it by anyone else is prohibited and may be acriminal offence.


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Contacts

Research Team

Tel No: +94 11 2317777 (General)

Email : [email protected]

Head of Research

Kishan Gunawardena

Tel No : +94 11 2317784


Dimantha Mathew

Tel No : +94 11 2317746


Udeeshan Jonas


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Capital Alliance Plc the Biggest Where Size Matters