INVESTMENT RESEARC CH INVESTMENT RESEA TAAGEER FINANCE COMPANY SAOG (.MSM) interest spread improving for finance companies from cheaper access to funds while finance debtors expected to grow attributable to an improving demandd for credit and an increase in equity capital RECOMMENDATIONN : HOLD CMP (19APR2011) TARGETT PRICE VARIANCE : : : RO 0.146 RO 0.154 5% COMPANY UPDATE INVESTMENT OPINIONN STOCK UPDATE April 21, 2011 Financial results of the latest two quarters of NBFC companies in Oman point at a robust YoY growth in net finance income driven by cheaper cost of funding and growth in net finance leases and working capital loans. Currently there is ample liquidity in the banking system and repo rates are not expected to rise in 2011 tracking movement in the US Fed rate. Banks are now more liberal in lending to the NBFC industry driving their cost of funds lower. Some of the companies have started to take advantage of this trend by replacing their more expensive corporate deposits with bank borrowings thereby improving their net interest spread. Average net interest spread improved to 4.8% in 2010 from 4% in 2009. ANALYSTS 12.0% Figure 1: Trend of Interest Spread for vs. Peers Anil Kumar, CFA ANALY Senior YST VP - Research Email: anilkumar@fincorp.org April 21, Anil Tel: Ku (+9 umar, 968) 2481665 CFA 55 Ext. 340 Sr. Vice President - Research 2011 Email: Gaurav anilkumar@f Ramaiya fincorp.org Tel: Asst. (+9 Vice 968) Presiden 24816655 nt 5 Ext. - Research 340 Email: gaurav@fincorp.org Gaurav Tel: (+9 968) Ramaiya 24816655 Ext. 320 Asst. Vice President - Research Email: Mable gaurav@finc Pereira corp.org Tel: Asst. (+9 Vice 968) Presiden 24816655 nt 5 Ext. - Research 320 Email: mable@fincorp.org Mable Tel: (+9 Pereira 968) 24816655 Ext. 323 Asst. Vice President - Research Email: mable@fincorp.org Tel: (+968) 248166555 Ext. 323 1 8.0% 6.0% 4.0% 2.0% 2005 2006 2007 2008 2009 2010
During the past five years, Muscat () has led the NBFC peer group by net interest spread and net interest margin followed by Taageer (). In 2010, earned a net interest spread of 5.9% followed by at 5.5%. Like wise, NIM of Muscat and Taageer were 7.8% and 7.5% respectively in 20100 against a group averagee of 6.8%. 12.0% Figure 2: Trend of Interest Margin for vs. Peers 1 8.0% 6.0% 4.0% 2.0% 2005 2006 2007 2008 2009 2010 The chart above suggests a likely inflection point in the industry s NIM in 2009. The nearterm impact of greater Omanisation and increase in minimum wages for Omanis is expected to be moderate on the earnings of finance companies as their net finance income is expected to post a robust growth. According to industry sources, a higher staff cost can be easily absorbed in the mediumterm. Risk of higher provisions for companies that have not adequately covered their impaired assets is more worrying than wage hike. All the finance companies have been substantially raising their equity capital since 2010 in order to comply with the CBO s directive to achieve a minimum share capital of RO 20 million by June 2012. A better capitalization enables further growth in net finance debtors in the quarters ahead. Most finance companies including Taageer currently have a net worth of around RO 21 million and the CBO rules allow a leveragee of 5x networth for finance companies implying a potential size of finance debtors of RO 105 million. Taageer finance gross finance debtors are currently around RO 84 million and hence a 25% asset growth is possible by the end of 2012. However, asset quality has deteriorated for Muscat and Taageer at the end of 2010 as seen by a sharp rise in their impaired asset ratio in Fig 3 below: 2
35.0% Figure 3: Trend of Impaired Assets Ratio for vs. Peers 3 25.0% 2 15.0% 1 5.0% 2005 2006 2007 2008 2009 2010 Impaired asset coverage ratio slipped substantially for and to 55.5% and 50% respectively at the end of 2010 as they have not increased provisions proportionate to growth in their impaired assets. This poses a risk of a sharp increase in net provisions for these two companies going forward if recoveries don t turn out to be strong. 60 Figure 4: Trend of Coverage Ratio for vs. Peers 50 40 30 20 10 2005 2006 2007 2008 2009 2010 In terms of asset coverage ratio, Al Omaniya Financial Services leads the industry at 240% and its earnings are therefore of superior quality as compared to the other players. Oman Orix Leasing and National also have made adequate provisons for their impaired assets at 105% and 90% resepectively. We value using 1) P/BV multiple comparision to other finance company stocks and 2) by estimating a fair P/BV multiple for it based on our expectation of its sustainable longterm ROE, cost of equity and longbased term growth rate in earnings. We arrive at a fair value of RO 0.154 for the stock on a cumrights basis on thesee two methods. 3
INDUSTRY ANALYSISS Oman s NBFC industry is moderately concentrated and evenly distributed: Taageer () is the fourth largest NonBanking Company (NBFC) in Oman by net finance debtors (RO 80.92 mn as on Mar 31, 2011). The company enjoys a 16% market share in Oman s RO 502 million NBFC industry (by net finance debtors) in close competition with players like Muscat and National. Figure 5: Market share by net finance debtors (Dec 31, 2010) United 14% Oman Orix Leasing Co 12% Muscat 16% National 16% Taageer 16% Al Omaniya Financial Services 26% Source: Company financial statements, P Investment Research tops its peer group in terms of 5 year average ROE at 16.9% but the same trend may not hold owing to a signficant increasee in capital and a slower growth in finance debtors compared to. Our study on Oman s NBFC industry reveals that all the six listed players currently operate with only one business segment, i.e. financing and it is difficult to sustain a ROE of more than 17% through financing alone unless a firm adopts a loose lending policy taking huge credit risks. During bad times, such loose lending policies can severely damage a firm as seen in the case of erstwhile market leader, United. Figure 6: Five year average ROE 18.0% 16.0% 14.0% 12.0% 1 8.0% 6.0% 4.0% 2.0% Muscat Al Omaniya Financial Services Oman Orix Leasing Co Taageer National United 4
Figure 7: Leasing portfolio and finance income growth in Oman's leasing sector (2005 2010) 3 25.0% 2 15.0% 1 5.0% finance debtors (5yr CAGR) finance income (5yr CAGR) Source: Company financial statements, P Investment Research VALUATION Relativee Valuation Valuation of NBFC companies can be compared based on P/BV multiple whichh also reflects their ability to sustain a particular level of ROE in the medium to longterm. an attractive P/BV band for stock accumulation. A historical study of P/BV range over the past five years for these firms also aids in determining Company Muscat Al Omaniya Taageer National United Oman Orix Peer group average Last Reported BVPS (RO) 0.150 0.220 0.123 0.120 0.128 0.145 Source: Company financial statementss and P Research worth (Q1 2011) 2010 stock (RO'mn) Dividend 22.19 12% 34.17 7% conv bonds 24.46 12% 20.94 32.422 19.98 16% 0% 25% Nearterm proposed capital raise RO 4 mn rights issue at par Outstanding shares (mn) 168.00 155.58 166.67 175.54 250.00 167.75 Expected Stock P/BV (post BVPS (RO) price (RO) dilution) 0.132 0.196 1.48 0.220 0.280 1.28 0.147 0.135 0.92 0.119 0.120 1.01 0.130 0.066 0.51 0.119 0.086 0.72 0.99 Note: Stock price of RO 0..135 for Taageer is the equivalent exrights price of its current market price of RO 0.146. 5
Figure 8: Taageer P/BV ValuationBand 1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.9x 2006 2007 2008 2009 2010 P/BV High P/BV Low Current P/BV Source: Company financial statements, P Investment Research As shown in the table below, the mean P/BV of the sector is 0.99x after adjusting the reported book values for capital raise and stock dividends distrbuted in 2010. Owing to a lower level of provisioning, we believe that Taageer is appropriately trading below the mean P/BV. Table 2: Expected Dividend Yield 3.7% 7.2% 4.4% 3.5% Justified P/BV Valuation (Gordon Growth Method) This valuation is based on a fair P/BV multiple of 1.00x based on the Gordon Growth Model as shown below, applied to the 2010 book value for of RO 0.161 (adjusted for stock dividend): Formula: Justified P/BV = (ROE g)/(k g) Sustainable earnings growth rate, g = 3. 0% Current implied cost of equity, k = 11.0% Sustainable ROE = 11.0% Fair P/BV = (11% 3%) / (11%3%)= 1.00x Current book value per share = RO 0.161 Fair value for stock = 1.00 x RO 0.161 = RO 0.161 Based on the above two methods, our target price for (Average of RO 0.146 and RO 0.163) is RO 0. 154 on a cumrights basis. 6
FINANCIALS (RO '000) Income from financing activities Interest expense income from financing activities Other income INCOME STATEMENT 2005 2006 2007 2,487 3,4244 5,439 626 850 1,532 1,861 2,574 3,907 11 1,861 2,574 3,918 2008 7,583 2,385 5,198 5,198 2009 2010 8,786 8, 778 3,536 3, 151 5,250 5, 627 1 167 5,251 5, 794 General and administrative expenses Depreciation Operating profit before provisions for impairment (571) (864) (1,079) (36) (47) (65) 1,254 1,663 2,774 (1,557) (1,849) (1, 893) (100) (129) (108) 3,541 3,273 3, 793 Impairment for finance lease and working capital finance (304) (423) (769) Profit before tax 950 1,240 2,005 (817) (1,010) (871) 2,724 2,263 2, 922 Taxation profit EPS (148) (196) (330) 802 1,0444 1,675 0.011 0.014 0.022 (323) 2,401 0.030 (60) (457) 2,203 2, 465 0.026 0. 022 BALANCE SHEET (RO '000) Cash and bank balances 2005 1,410 2006 314 2007 503 investmentt in working capital and finance leases Total assets 23, 020 24, 600 31,762 32,372 53,766 54,781 2008 370 71,082 2009 1,776 72,451 2010 1, 691 77,479 72,462 75,931 80,287 Share capital Shareholders equity Unsecured Compulsory Convertible bonds Total shareholders equity 7,500 9,707 7,5000 10,228 7,500 11,153 9,707 10,228 11,153 7,875 12,935 4,316 17,251 8,505 11,325 14,507 20,608 4,316 18,823 20,608 Bank borrowings Deposits Total liabilities BV 10, 890 16,731 1,7377 30,787 6,241 14, 893 1.294 22,144 0.136 43,628 0.149 34,956 12,478 55,211 39,772 10,782 57,108 41,587 9, 916 59,679 0.219 0.221 0. 182 Source: Company financial statements 7
Total finance debtors Less: Impairment provisions finance debtors Bank borrowings / Corp bonds Corporate deposits Total funding Nonperforming assets (NPA's) Cash dividend (%) Stock dividend (%) CMP Cash Div Yield Growth in net finance debtors Growth in net finance income Avg. yield on finance debtors Avg. cost of funding interest spread interest margin Impaired assetss ratio Coverage ratio ROAE ROAA Key Financial Data 2005 23,837 817 23,020 2006 33,010 1,248 31,762 2007 55,801 2,035 53,766 2008 73,953 2,871 71,082 2009 75,235 2,784 72,451 2010 80,579 3,100 77, 479 10,8900 16,731 30,787 34,956 39,772 41,587 1,737 6,241 12,478 10,782 9,916 10,890 18,468 37,028 47,434 50,554 51, 503 1,7888 1,834 1,932 1,957 2,327 6,196 7.50% 0.00% 10.00% 0.00% 8.00% 5.00% 8.00% 8.00% 8.00% 7.00% 7.00% 11.85% 0.160 4.38% Financial Ratio Analysis 2005 33.4% 25.9% 2006 38.0% 38.3% 2007 69.3% 51.8% 2008 32.2% 33.0% 2009 1.9% 1.0% 2010 6.9% 7.2% 12.4% 6.3% 6.0% 9.2% 12.5% 5.8% 6.7% 9.4% 12.7% 5.5% 7.2% 9.1% 12.1% 5.6% 6.5% 8.3% 12.2% 7.2% 5.0% 7.3% 11.7% 6.2% 5.5% 7.5% 7.50% 5.56% 3.46% 2.65% 3.09% 7.69% 45.7% 68.0% 105.3% 146.7% 119.6% 5 10.3% 10.5% 15.7% 16.9% 12.2% 12.5% 3.8% 3.7% 3.8% 3.8% 3.0% 3.2% Source: Company financial statements 8
Anil Kumar, CFA Gaurav Ramaiya Mable Pereira INVESTMENT RESEA CONTACT DETAILS (+968) 24816655 Ext. 340 anilkumar@fincorp.org (+968) 24816655 Ext. 320 gaurav@fincorp.org (+968) 24816655 Ext. 323 mable@fincorp.org Disclaimer The research team of The Financial Corporation, SAOG (hereto referred as P) has prepared the information, analysis and expressed its opinion on the subject matter of this report. The information contained has been obtained from sources believed to be reliable and in good faith, but which may not be verified independently. While utmost care has been taken in preparing the above report, P makes no guarantee, representation or warranty, whether express or implied, and accepts no responsibility or liability as to its accuracy or completeness of the data, being provided. All investment information and opinions are subject to change without notice. The investor will indemnify P and its directors, officers, and employees against any loss or damage or other liabilities (including costs), which they may suffer as a result of reliance on this report. This report is not to be relied upon in substitution for the exercise of independent judgment. Also, not all customers may receive the material at the same time. This document is for private circulation and information purposes only. It does not and should not be construed as an offer to buy or sell securities mentioned herein. P will not be liable for any direct or indirect losses arising from the use thereof, and the investors are expected to use the information contained herein at their own risk. P and its affiliates or their officers, directors and employees may own or have positions in any investment mentioned herein or any investment related thereto and from time to time add to or dispose of any such investment. P and its affiliates may act as market maker or assume an underwriting position in the securities of banking companies discussed herein (or investments related thereto), and may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting servicess for or relating to those banking companies. Authors or contributors of this report could have direct interest in the capital market or in the securitiess mentioned herein. The investments discussed or recommended in this report may not be suitable for all investors. Investors must make their own investment decisions based on their specific investment objectives and financial position, and using such independent advisors, as they believe necessary. Income from investmentss may fluctuate. The price or value of the investments, to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. This document is strictly for the use of recipients only. None of the material provided herein may be reproduced, rewritten, rehashed, published, resold or distributed in any manner whatsoever without the prior and explicit written permission of P. 9