Steady growth to continue for CFC
Investment Summary
* We had recommended a price target of 755fils for the Commercial Facilities Company (CFC) stock in April-2006. The share price has dropped since then which was mainly due to correction witnessed in the Kuwait stock market in 2006.
* For the year 2006, we had projected gross profit and net profit of KD31.35mn and KD32.97mn respectively in our April 2006 Report. However the company's actual results for 2006 showed that it had made gross profit and net profit of KD31.29mn and KD29.07mn respectively for the year. The gross profit level was close to our projections but the net profit level fell short of our projections by 11.8%.
* The company's net profit for the FY2006 declined by 6.5% to KD29.07mn as compared to KD31.10mn recorded in the previous year. Though the company achieved good growth in its core income i.e. income from installment credit, the net profit declined due to a dip in the investment income.
* CFC's total assets stood at KD368.57mn at the end of 2006, a decline of 3.8% over 2005. Around 87% of the assets were deployed in the core business (net installment debtors) and about 10% of assets were in investments (both quoted and unquoted investments). Decline in net installment debtors in 2006 was the primary reason for the drop in assets. Net installment debtors declined by 7.4% to reach KD319.68mn at the end of 2006 as compared to KD345.24mn in 2005. The decline in the portfolio was on account of stricter implementation of credit exposure norms.
* Non-performing loans to gross loans has remained at 6.4% in 2006, the same level as that of the previous year. Company's strict credit criteria for new customers as well as building an efficient and experienced collection and follow-up team has helped in maintaining low NPL level. The company makes adequate provision for NPLs. At the end of 2006, the total provisioning level was more than 100%.
* For the period 1Q07, the income from installment credit was KD10.60mn i.e. down 10.3% from corresponding period last year. However the net profit for the period was up by 6.2% compared to 1Q06. The increase in net profit in 1Q07 was mainly due to investment income, which was KD0.96mn for the period as against a loss of KD1.35mn in 1Q06.
* Demographics have been the main driver of the consumer finance industry in recent times. During the period 2001-06, the total population of Kuwait has increased at a CAGR of 6.6%. The total working population, which represents the majority of the consumer finance market, has also been increasing steadily over the years. This is expected to further drive the consumer finance market in Kuwait.
* CFC has established a new company which will be engaged primarily in financing real estate activities. The CFC's stake will be 25% in the new company. This move by CFC will help strengthening its product portfolio.
* We recommend a BUY and value the company's stock at an intrinsic value of 637fils based on the Dividend Discounting Model and Peer Group Valuation method.
Recent Developments
Credit Facility
CFC obtained a US$175mn, five-year syndicated term-loan facility in June'07, which was arranged by Arab Banking Corporation (ABC), who acted as the mandated lead arranger. Syndication received good support from the bank market and as a result, the facility amount was increased from the initial US$150mn to US$175mn. Syndicate included leading institutions from the GCC, North Africa and Europe like Qatar National Bank, Raiffeisen Zentralbank Österreich (Austria), Riyad Bank, Doha Bank, National Bank of Bahrain, National Bank of Egypt (UK), Union Tunisienne de Banques, Bahraini Saudi Bank and Bank Sohar. The company informed that the five-year loan will bear an interest margin of 70 basis points above the LIBOR and will finance its growing operations.
Financing
In the first quarter of 2007, CFC established a company named 'Tasshilat Real Estate Finance Company' with a capital of KD25mn. The newly-formed company will be engaged primarily in financing real estate activities. CFC's stake will be 25% in the new company, while the remaining will be offered to strategic investors and CFC's current shareholders.
In 2006, CFC established a wholly owned subsidiary named 'First Financial Real Estate Company W.L.L' with a capital of KD50,000. The company will be engaged in real estate activities.
Rating
During July 2006, CFC obtained a rating of A- along with stable outlook from Capital Intelligence for its bond issue. Capital Intelligence noted that the company remains well capitalized and has a stable and well-diversified funding base. The asset quality of the company is very good and the operational efficiency is excellent. However, Capital Intelligence remarked that they would not want to see the leverage go much higher if this rating is to be maintained.
Financial Performance
Installment Income
CFC achieved good growth in installment income during the year 2006. Income from installment credit recorded a growth of 14% in 2006 to reach KD45.50mn as compared to KD39.92mn in 2005. The company has benefited from an increasing interest scenario in 2006. The average return from installment credit portfolio was 10.6% in 2006, as compared to 9.7% in 2005. The cost of borrowing also increased to 6.5% in 2006, up from 5.5% in 2005. As a result, the interest spread for 2006 declined marginally to 4.1%, down from 4.2% in 2005. The net income from installment credit (after deducting the overall cost of borrowing) reached KD31.23mn in 2006 as compared to KD28.22mn in the previous year, an increase of 10.7%.
Total Income
The total income for 2006 was KD33.15mn, down 5.5% from KD35.07mn in 2005. This decline was on account of a dip in the investment income. The investment income for 2006 was KD0.68mn, down 89.1% from KD6.28mn in 2005. The Kuwait market, as measured by Global General Index, was down 9.2% in 2006 as opposed to a gain of 67.6% recorded in the previous year, which resulted in decline in investment income of CFC
Net Profit
In-line with decline in total income, the net profit also declined in 2006. The net profit for 2006 was KD29.07mn, down by 6.5% from KD31.10mn in 2005. The rise in staff expenses and increase in provision for doubtful debts also contributed to decline in net profit. Due to the drop in net income, the average return to shareholders decreased from 23.1% in 2005 to 20.3% in 2006.
Assets and Liabilities
At the end of 2006, the total assets stood at KD368.57mn, a decline of 3.8% over the previous year. The decline in assets was triggered by a dip in installment credit portfolio, which accounted for 86.7% of the total assets of the company at the end of 2006. The other major part of the assets was the investment portfolio, which constituted 10.4% of the total assets of the company.
CFC's gross installment credit portfolio declined by 7.1% to KD412.40mn in 2006. The decline in the portfolio was on account of stricter implementation of credit exposure norms. This stricter implementation was due to establishment of Credit Information Network (Ci-Net) in Kuwait. As per the management, 2005 was an exceptionally good year for CFC, which makes 2006 results to look comparatively lower.
At the end of 2006, shareholder's equity to total assets was 39.2%. On the liabilities side, CFC has continued its strategy of financing mainly through term loans. Along with the decline in the asset base in 2006, the total long-term loans also declined in 2006. The total term loans at the end of 2006 were KD178.31mn, down 3.2% form 2005 level. The term loans are usually secured with assignments of finance receivables.
The interest rates have been increasing in recent times. The company has managed to control the cost of funding up to a large extent by increasing their US Dollar exposure because current borrowing cost in US Dollar is cheaper than borrowing in Kuwaiti Dinar. The management has increased the proportion of US Dollar borrowing to 67% of the total borrowing in 2006 as compared to 64.1% in 2005. However the average borrowing cost has gone up in 2006 as compared to 2005. The average weighted interest rate on Kuwait Dinar loans was 7.3% and US Dollar loans was 6.3% in 2006, as opposed to 7.1% and 5.5% respectively in 2005. The company's financing operations during the year included new financing lines amounting to KD35mn and US$225mn.
Loan Portfolio
Around 95% of the customers of CFC are Kuwaiti nationals. The management has informed that they will follow this policy in the short to medium term. In fact the proportion of Kuwaiti nationals in the total portfolio has gone up from 90% to 95% in recent years.
The growth rate in customer base has been rather slow for the company. At present, the total number of customers is close to as 110,000 compared to 100,000 recorded at the end of 2003, which translates to roughly 3% growth per annum. The slower growth in customer base can be attributed to the company's willingness to sacrifice new business in order to maintain its existing quality customer base. Although CFC offers diversified consumer finance products, its core activity is auto financing, which constitutes around 65% of its loan portfolio. Around 30% of the loan portfolio comprises of personal cash loans, while the rest 5% is other financing. In addition, retention rate of customers is nearly 70%, which shows that CFC has built strong customer loyalty over the years.
Non-Performing Loans
Non-performing loans to gross loans has remained at 6.4% in 2006, the same level as that of the previous year. Company's strict credit criteria for new customers as well as building an efficient and experienced collection and follow-up team has helped in maintaining low NPL level. As a policy, the company does not write off debts until there is absolutely no possibility of recovering them. The amount written off during 2006 was only KD12,000. This policy of the company reflects in a higher NPL level compared to that of banks in Kuwait. The average NPL level of the banks in Kuwait was 2.6% of gross loans for 2006. The company makes adequate provision for NPLs. At the end of 2006, the total provisioning level was more than 100%. We expect provision to remain above 100% in the medium term. The management believes that the Credit Information Network (Ci-Net) will contribute to further reduction in the delinquency profile. In addition, the company maintains a significant in-house customer database, which it has built over the past 30 years.
First Quarter 2007 Results
The income from installment credit has declined in the first quarter of 2007 compared to same period last year. The YoY decline of 10.3% was a result of reduced installment credit portfolio. The installment credit portfolio at the end of Mar'2007 was KD318.69mn as compared to KD339.44mn at the end of Mar'2006.
The gross profit declined by 14.5% in-line with decline in the income from installment credit. However, the net profit was up 6.2% compared to same period last year. The improvement in net profit was due to profits from investments, whereas there was a loss from investments during the 1Q2006.
The total assets of the company stood at KD371.44mn at the end of 1Q2007, representing a marginal increase of 0.8% over end of 2006. The increase in assets was on account of increase in investment in associated companies. During the period, the company established a company named 'Tasshilat Real Estate Finance Company' with a capital of KD25mn. The newly-formed company will be engaged primarily in financing real estate activities. The decline in the net installment credit also continued in 1Q2007 due to strict implementation of credit exposure norms. The net installment credit portfolio at the end of 1Q2007 was KD318.69mn, down 1.2% from KD319.68mn at the end of 2006.
© Arab Times 2007
