central finance company plc equity research

BUY

LOLC SEC Valuation LKR 329.60 Share Price (10.02.15) LKR 250.00 Upside/Downside +31.80% Risk Level Medium (refer page 21 for recommendation guidance)

Share Details

Bloomberg Ticker CFIN SL

CSE Sector Banks, Finance & Insurance GICS Sector Financials Market Cap (LKR Mn) 26,220 Issued Quantity (Mn) 104.883 30-day avg T/O (LKR Mn) 2.713 Beta (2 years) 0.940

Investment Fundamentals

LKR Bn 2014

A

2015

EE

2016F 2017F

Revenue 8.6 8.5 9.4 10.6 Net Profit 3.3 3.5 3.9 4.5 S/H’s Equity 20.9 24.5 28.3 32.8 Total Assets 65.4 77.7 89.8 103.8 ROA (%) 5.4% 4.9% 4.6% 4.6% ROE (%) 17% 15%

%

15% 15%

Investment Ratios

PE (x) 7.29 PBV (x) 1.11 Div Yield (%) 1.28

Per Share Details as at 31.12.14 (LKR)

Earnings per share (TTM)

2.93

34.31 Net Asset Value per share

215.53

223.74 Dividend per share (TTM) 3.20

Business Nature

Central Finance Company PLC (CFIN) is a Licensed

Finance Company engaged Leasing, Hire Purchase,

Deposit Mobilization, Insurance Broking and other non-

banking financial services.

Shareholder Details

Corporate Services 16%

Mr. E. H. Wijenaike 15% Employees' Provident Fund 11% Shareholders below 5% 52%

Source: CSE, Bloomberg, LOSEC Research

Analyst(s):

Shehan Bartholomeuz

+94 117 880835

[email protected]

Central Finance Company PLC

Initiation Coverage

11 February 2015 | LOLC Securities Research Publication

Recommendation Guidance, Important Disclosures and Analyst Certification: Page 22

Equity Research

Salient Sections of the Report

NBFI sector generates higher yields on aggressive penetration (pg.2) | CFIN stands out on

low cost (pg.4) | CFIN’s robust Interest Spread to drive the top line (pg. 6) | Sound Asset

Quality and Credit Profile (pg.7) | Conservative Approach to reduce Risk Premium (pg.8) |

Strong Franchise and Wide Reach to drive the Business (pg.9) | Nations Trust Bank: A

Sweetener on CFIN’s Value (pg.10) | Valuation (pg.11) | Sensitivity (pg. 12) | Earnings risk

comment (pg. 12) | Appendices (pg.13)

High Yielding Assets, with Unaffected Quality

We expect Sri Lanka’s financial sector to play a pivotal role in economic growth of the

country providing the liquidity to the system. Especially the financial institutions with

exposure to fast growing economic segments such as retail and SME are expected to

outperform in terms of advances growth, albeit with weaker asset quality. CFIN has been

able to attain the best of both worlds with sound asset quality while maintain high

profitability with its exposure to high yielding portfolios.

Investment Considerations

Aggressive penetration of NBFIs: Targeting client bases which are not accessed through

traditional banking channels resulting high profitability is a common feature in Non-

Banking Finance Institute (NBFI) sector. Accordingly, CFIN being a pioneer NBFI in the

country has been able expand fast after the end of civil conflict, and we see CFIN to leverage

on its strong foothold in the financial sector and expect continuous strong performance in

bottom line.

Strong Franchise to market its products: CFIN is one of the oldest finance establishments

in the country and is a household name to finance a vehicle. With its widespread presence

across Sri Lanka, the strong brand name gives it competitive advantage in the NBFI market.

Stable Interest Spread and Top Line Growth: CFIN has been able to maintain high interest

spread over the years even during adverse interest environments. It has been able to keep

funding costs mainly from deposit mobilizations, at lower levels on its higher credit

reputation and franchise name. Furthermore company has been able to continually grow its

high yielding advances portfolios.

Streamlined cost structure to drive the profitability: CFIN has one of the lowest

Efficiency Ratios (Cost to Income) in the industry resulting in strong top line performance to

be reflected in company’s profits.

Sound Asset Quality: CFIN has low NPL ratios compared to the industry and maintain

conservative loan to value ratios with controlled loan book expansion.

Investment into a high yielding bank: CFIN’s associate investment in Nations Trust Bank

PLC (NTB) is a highly profitable venture as NTB is a fast growing mid-size Licensed

Commercial Bank generating high ROEs, contributing significantly to CFIN’s bottom line.

Valuation

We believe Sri Lanka’s financial sector to show robust growth and CFIN to continue to be a

strong player in non-banking sector. We have valued the counter using Residual Income

Valuation model and accordingly counter is trading at discount to our valuation. We give

Buy recommendation for CFIN.

100.00

200.00

300.00

06/02/12 06/02/13 06/02/14 06/02/15

LKR

Price Behaviour

ASI movement (adjusted to CFIN base price) CFIN Share Price

Initiation Coverage: Central Finance Company PLC | 11 February 2015

2 | LOLC Securities Limited

NBFI sector generates higher yields on aggressive penetration Sri Lanka’s financial sector has taken off since the end of civil conflict on the economic optimism. Country’s credit environment has improved significantly with lower interest rates, low inflation rates and higher economic activity resulting in higher demand for credit products. We expect similar growth in mid to short term (3-5 years) in the financial sector with continually improving macroeconomic fundamentals.

Graph 1: Graph 2: Despite fast growth of advances, country remains comparatively under financed compared to peers

During the post war period NBFI (Non-Banking Finance Institutes/Licensed Finance Companies) sector has been able to outperform traditional LCBs in terms of assets growth as NBFIs have been fairly aggressive to tap into credit growth. NBFIs’ business models give them the flexibility to grow their advances portfolios in riskier assets than LCBs and they have been tapping into fast growing economic segments in the low end of spectrum (mid to low income earning population). NBFIs have also generated higher yields on its loan portfolios with its loan portfolios tilted toward high yielding (albeit riskier) assets. For instance, leasing and HP portfolios account to about 67% of NBFI advances.

Graph 3: Breakdown of Advances of NBFI Sector (As at FYE 2013) Furthermore NBFIs’ more relaxed regulatory requirements compared to LCBs on the lending side, give more room for NBFIs to expand its accommodations compared to LCBs.

Source: CBSL Source: CBSL, World Bank data

0

2,000

4,000

6,000

8,000

10,000

12,000

2009 2010 2011 2012 2013

LK

R b

illi

on

s

Financial Sector Assets Lending Institutions Assets

Financial Sector has seen fast growth with lending sector leading the growth

0

20

40

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100

120

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160

180

200

%

Credit % of GDP

45%

22%

22%

5%

1% 2%

4%

Finance Leasing

Hire Purchase

Other Secured Loans

Pawning Advances

Loans against Real Estate

Loans against Deposits

Other

Lending sector assets have

grown by 17% CAGR

Source: CBSL

Credit Growth of c.15% for

next 5 years

NBFIs’ flexible and

aggressive business models

help them to outperform

banks on lending growth



Graph 4: Graph 5: NBFIs have considerably higher interest margins compared to banks

Despite higher margins, most of the small NBFIs struggle with high funding costs, high operational costs and higher provisioning costs due to poor asset quality. This has resulted in significant volatility in profitability for NBFI sector. Especially these smaller finance companies are more susceptible for external credit environment fluctuations. But larger NBFIs (including CFIN) has more streamlined cost structures with better asset quality and access to low funding options. Therefore large NBFIs have recorded continuously high ROEs, even during adverse credit environments.

Graph 6: Volatile profitability of NBFI Sector Graph 7: Large NBFIs outperform the sector profitability

Source: CBSL Source: CBSL

0

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5,000

6,000

0

100

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400

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2009 2010 2011 2012 2013

LC

B (

LK

R b

illi

on

s)

NB

FI

(LK

R b

illi

on

s)

NBFI Assets LCB Assets

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

2009 2010 2011 2012 2013

%

Banking Sector NIM NBFI NIM

Source: CBSL Source: Bloomberg, CBSL

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

2009 2010 2011 2012 2013

%

Banking Sector ROE NBFI ROE

-5.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0

2009 2010 2011 2012 2013

%

NBFI ROE Leading NBFIs ROE

NBFIs have shown stronger growth than traditional

banks

NBFI CAGR of 24.6%

+310bps

But with higher cost

structure…

…yet larger NBFIs have

more streamlined cost

structure



CFIN stands out on low cost Whilst large NBFIs generally have lower cost base compared to their smaller counterparts, CFIN has even more streamlined cost structure compared to other large NBFIs. Deposits are the major source of funding in Sri Lankan financial institutions with deposits accounting to 70% and 47% of total funding of banking sector and NBFI sector respectively. Larger NBFIs with stronger franchise and sound credit reputation have been able mobilize deposits more aggressively accounting for higher proportion of funding. Similarly CFIN has higher portion of deposits as a percentage of total funding. Its total cost of funding also has been comparatively low with cheaper deposit financing compared to peers on CFIN’s stronger franchise.

Graph 8: CFIN’s funding is dependent on deposits Graph 9: CFIN has comparatively low funding cost

CFIN also has a well streamlined cost structure comparison to the top line revenue it generates. CFIN has continued its expansion across the country in past few years, but at the same time it has adopted low cost operational models putting less pressure on the bottom line. It has also adopted a strategy of setting up secondary branches (micro branches) which have lower cost base with back office functions are centralized. As of 31.03.2014, 28% (24) of branches consisted of micro branches.

Graph 10: Lower Cost to Income Ratio

0

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20

30

40

50

60

70

80

CFIN LOFC LFIN PLC CLC COCR

%

Cost to Income Average

Source: Annual Reports, LOLC SEC Research Source: Annual Reports, LOLC SEC Research

Source: Bloomberg, LOLC SEC Research

0%

20%

40%

60%

80%

100%

120%


Deposits % of Total Funding Average

10%

11%

11%

12%

12%

13%

13%

14%

14%

15%


Average Cost of Funding Average

Access to cheaper deposit

financing gives lower

funding cost for CFIN

Operational cost also low

compared to peers



NBFIs generally have higher cost base compared to banks with higher funding costs (banks have access to cheaper finance including access for zero interest demand deposits) and higher operational costs (aggressive market penetration of NBFIs result in higher operational costs). Higher cost structure is generally compensated by high interest income earned by the NBFIs but it makes it vulnerable external credit environment. i.e. adverse environment can weigh on the bottom line. Comparatively CFIN’s streamlined cost structure helps the company to steer through adverse market environments, which is reflected by CFIN’s stable ROE levels over the years.

Graph 11: Shift towards lower operational cost model Graph 12: Stable ROE despite industry fluctuations

Source: Annual Reports, Bloomberg, LOLC SEC Research Source: Annual Reports, CBSL, Bloomberg, LOLC SEC Research

0

10

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40

50

60

70

2008 2009 2010 2011 2012 2013 2014

%

Cost to Income Ratio

-5

0

5

10

15

20

25

30

35

40

2010 2011 2012 2013 2014

%

CFIN ROE Industry ROE

Lower cost structure

resulting in less volatility in

profitability



CFIN’s robust Interest Spread to drive the top line CFIN has been able to increase its interest spread over the years with low cost funding (See pg. 4) and high yielding assets. CFIN asset portfolio is significantly tilted towards high yielding commercial vehicle financing portfolios such as construction vehicles (trucks, tippers, lorries), delivery vans and three wheelers. CFIN has strong competitive advantage in the market in this segment. More established LCBs are reluctant to operate in this segment due to lower risk appetite of the LCBs (but CFIN does maintain strong asset quality (See pg. 7)) whilst other NBFI generally do not possess the brand franchise and the reach (See pg. 9).

Graph 13: Interest Spread has increased

NBFIs in Sri Lanka generally have significant asset liability maturity mismatches with long term asset portfolios being funded by short term liabilities (mainly short tenure deposits). This is a main reason for higher interest spreads in the sector, but it also exposes it to interest rate risk. CFIN is also susceptible to maturity mismatch, but in recent times it has been curtailed down, increasing its exposure to longer term borrowings. Furthermore company also has sufficient unutilized credit lines to fund its maturity mismatches (Source: Fitch Lanka).

Graph 14: Difference of Asset Proportion and Liability Proportion under three maturity categories

0.0%

5.0%

10.0%

15.0%

20.0%

25.0%

2008 2009 2010 2011 2012 2013 2014

Interest Spread Average Cost of Funding Earning Yield

Source: Annual Reports, Bloomberg, LOLC SEC Research

Source: Annual Reports, LOLC SEC Research

-50%

-40%

-30%

-20%

-10%

0%

10%

20%

30%

< 12 months 1 to 3 years > 3 years2013

2014

High Asset Liability mismatch in short term

with large short term deposit base (liability)

Higher proportion of assets in longer

maturities with less long term liabilities

Interest spread has widened

over the years

Significant Asset Liability

Mismatch



Sound Asset Quality and Credit Profile CFIN’s lending portfolio contributes to about 74% of total assets and the lending portfolio is mainly consisting of commercial vehicles to individuals in the SME sector. HP and Lease portfolio accounts to more than 90% of lending portfolio. Company also have substantial operating lease / vehicle hire business which contributes to about 5% of revenue and 2% of Total Assets. Accordingly company has significant exposure to vehicle financing, increasing risk of exposure to single asset class. But the CFIN maintains a conservative loan to value ratios around 70-80% in its vehicle advances strengthening the collateral backed asset quality. The country’s legal framework allows lessor to foreclose on non-performing assets with recourse to the judicial system mitigating credit risk of HP and lease portfolios. Furthermore CFIN is fairly stringent in its loan evaluation process and comparatively conservative in loan book expansion resulting in stronger asset quality. Accordingly CFIN has low NPLs compared to sector. Graph 15: Gross NPL Ratios of the peers

CFIN has fairly dispersed loan portfolio with top 20 portfolios accounts to 3.3% of advances. Furthermore 88% of loan contracts are for loans under LKR 1 million, reflecting granular business model of the company (Source: Fitch Ratings). CFIN has a A+(lka) credit rating assigned by Fitch Ratings Lanka. Graph 16: Credit Rating

0%

1%

2%

3%

4%

5%

6%

7%

8%


Gross NPL Industry GNPL (as at August 2014)

Source: Interim Financials, CBSL

Source: Fitch, ICRA, Lanka Rating

0

1

2

3

4

5

6

7

8

9


Credit Rating Score

Credit Ratings Score

We have given credit score based on below guideline AAA 11 AA+ 10 AA 9 AA- 8 A+ 7 A 6 A- 5 BBB+ 4 BBB 3 BBB- 2 BB+ 1

Stringent loan evaluation

process and conservative

loan to value resulting in

sound asset quality despite

high exposure in riskier

assets.

Investment grade credit

rating



Conservative Approach to reduce Risk Premium

Despite strong franchise and fast branch expansion CFIN has been fairly conservative in loan disbursement. Therefore its assets growth has lagged the other leading NBFIs.

Graph 17: Assets Growth Comparison

CFIN’s conservative growth is also reflected by its comfortable capital adequacy levels. CFIN has significantly high CARs compared to peers. High capital adequacy gives CFIN room for capital expansion without altering the credit profile of the company significantly.

Graph 18: Sound capital adequacy

Source: Bloomberg

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70

80

0

10

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30

40

50

60

70

80

90

100

CFIN LOFC LFIN PLC COCR

% %

Total Assets Growth - 5 years (annualised) Total Equity Growth - 5 years (annualised)

Source: Bloomberg

0.00%

5.00%

10.00%

15.00%

20.00%

25.00%

30.00%

CFIN LOFC LFIN PLC COCR

Core Capital Ratio Total Capital Ratio

Moderate growth

High capital adequacy



Strong Franchise and Wide Reach to drive the Business CFIN being the second oldest finance company has built a strong franchise during its operations over five decades. It is the second largest NBFI in terms of Asset base and is a house hold name in Sri Lanka for vehicle financing. CFIN’s brand is ranked 30th most valuable corporate brand in Sri Lanka by Brand Finance and is the second most valuable brand (after PLC) among the NBFIs. Strong franchise helps CFIN to attract business as well as mobilize deposits at cheaper interest rates compared to competitors.

Table 1: Brand Franchises of NBFIs in Sri Lanka Graph 19: Well distributed branch network of CFIN

Company Brand Value (USD mns)

Brand Rating

PLC 34 AA-

CFIN 16 A

LFIN 14 A

TFC 8 BBB

COCR 5 A

VFIN 4 A-

SFCL 3 BB

CRL 2 BB

SFIN 2 BB

Source: Brand Finance Source: CFIN Annual Report 2013/2014

26

7

4

7

12

8

8

8

6

No. of branches are indicated in each province



Nations Trust Bank: A Sweetener on CFIN’s Value CFIN has made a strategic investment in to Nations Trust Bank PLC owning 20% of the Licensed Commercial Bank. NTB has been one of the fastest growing mid-size LCB in Sri Lanka and it is also one of most profitable banks in the country. NTB’s high profitability is mainly driven by strong presence in credit card business with American Express franchise and high yielding advances such as leasing products. NTB mainly operates in retail and SME sectors and increasingly looking forward to diversifying into corporate loans.

Graph 20: NTB has superior profitability Graph 21: NTB has grown significantly over the years

Despite strong profitability and rapid growth NTB has maintained sound asset quality with diversified portfolio of advances and sound NPL levels.

Graph 22: Diverse portfolio with exposure to high yields Graph 23: NPLs below the average

We expect NTB to continue with the growth momentum supported with branch expansion and fast credit growth. CFIN carries NTB in its book at LKR 2.1 billion. NTB will continue to generate superior return on assets for CFIN and will add a significant value to CFIN.

Source: LOSEC Research, Bloomberg Source: Bloomberg

-

1

2

3

4

5

6

7

-5

0

5

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15

20

25

COMB NTB NDB SEYB HNB SAMP UBC PABC

% %

ROE NIM

0

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100,000

120,000

140,000

160,000

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013LK

R m

illio

ns

Total Assets Customer Deposits

Source: NTB Interim Financials Source: Interim Financials, CBSL

18.9%

26.7%

26.7%

12.4%

1.9%

1.5%

11.9%

Overdrafts

Term Loans

Leases

Credit Cards

Corporate DebtSecurities

Housing Loans

Other Advances 0%

2%

4%

6%

8%

10%

12%

14%

COMB NTB NDB SEYB HNB SAMP UBC PABC

Gross NPL Sector GNPL (August 2014)

Total Assets CAGR = 22.4% Customer Deposits CAGR = 30.7%

NTB is a fast growing bank

with high profitability

NTB’s growth to continue,

adding value to CFIN



Valuation We have used Residual Income valuation in deriving the valuation for CFIN. Accordingly we estimate total valuation for the company at LKR 33.9 billion. CFIN’s current book value (as at 30.09.2014) stands at LKR 22.6 billion and we estimate additional 50% value to be generated from value drivers we have discussed above. The market (CSE) has priced the company at LKR 26.0 billion which is still at a 23% discount for LOLC SEC valuation. We have taken Cost of Equity at 13% which is 6% premium to 3 year Sri Lanka Govt Treasury Bond Yield. Sensitivity of valuation for Terminal Growth and Cost of Equity is indicated below and sensitivity of key underlying assumptions are evaluated separately in proceeding section. Table 02: Valuation Sensitivity Matrix NTB Investment’s impact on valuation CFIN’s 20% stake in NTB has a material impact on overall CFIN’s valuation. Breakup of CFIN’s Valuation Value Per Share Value Proportion CFIN’s Valuation excluding NTB 28,714 274 83% NTB Valuation attributable to CFIN 5,853 56 17% CFIN Final Valuation 34,567 330 100% NTB’s valuation attributable to CFIN valuation is estimated using Residual Income Valuation model. (Cost of Equity - 13%. Terminal Growth – 5%) Table 03: Peer (including Regional) Comparison

Name Market Cap (USD Mn) PE Ratio PBV ratio Dividend Yield ROE

Central Finance Co PLC 195.8 7.5 1.2 1.3 17.0

LB Finance PLC 83.4 5.3 1.5 4.1 32.0

People's Leasing & Finance PLC 297.3 10.2 1.9 5.0 19.4

Commercial Credit & Fin PLC 109.9 8.0 3.1 1.1 55.1

Srei Infrastructure Finance (India) 344.9 15.4 0.6 1.2 4.0

Kyushu Leasing Service Co (Japan) 86.3 5.8 0.5 1.9 8.8

Muthoot Finance Ltd (India) 1,377.5 10.2 1.9 1.9 19.5

Potential Impact on ‘Super Gains’ Tax In recent interim budget presentation government proposed a one off new tax termed ‘Super Gains Tax’ of 25% on profits for companies which made more than LKR 2 billion profit on FY 2013/14. The proposal remains ambiguous but CFIN will most probably fall under the taxable category. For FY 2013/14 CFIN (at company level) has made PBT of LKR 3,707 million and if proposal goes through CFIN can be liable for new tax of LKR 927 million (Assuming taxed at PBT level). The impact would be valuation per share coming down to LKR 322 (-LKR 8), remaining as a BUY.

Share price in LKR

Cost of Equity

11% 12% 13% 14% 15%

Ter

min

al G

row

th

Rat

e

3% 335 323 314 307 300

4% 347 332 321 312 305

5% 363 344 330 319 310

6% 385 359 341 328 317

7% 418 381 356 339 325

Source: LOSEC Research

Source: LOSEC Research, Bloomberg

If CFIN becomes liable for

one off ‘Super Gains Tax’ the

cash outflow will result in

valuation to curtail down by

LKR 8 to LKR 322.



Summarized Sensitivity of Assumptions

Graph 24: Private Credit Growth: Medium Graph 25: Average Deposit Rate: High

Graph 26: Average Lending Rate: High Graph 27: Tax Rate: Medium

Earnings Risk Comment CFIN’s valuation is heavily dependent on overall credit growth of the economy and NBFI’s ability to maintain higher interest rate spread over the years. We have assumed a fast credit growth at tune of double digit growth in short term and high single digit in long term. Our optimistic credit growth forecasts are based on strong economic growth outlook of the country and comparatively low credit penetration of the economy. The main risk for revenue estimates of CFIN stems from the uncertainty of credit markets. Financial markets have tendency to move zigzag with good periods followed by rapid crashes which can be followed by lackluster periods. We have seen similar cases in recent times with Global Financial Crisis, European crisis, and the slowing credit growth witnessed by Sri Lanka from 2012 to mid-2014. These scenarios can affect the lending institutions badly with stagnant loan books, and particularly for the institutes with weak asset quality will suffer most during adverse credit environments. But on a positive note CFIN’s performance was not much affected by slowing credit growth of the country during 2012 to mid-2014 due to sound asset portfolio and leaned cost structure of CFIN. Nevertheless CFIN is susceptible to negative credit environments in the country which can impact the earnings of the company. In terms of interest spread there is a risk of reducing spread in the long term with reducing market interest rates and lowering market spreads. The banks entering the high yield business segments where NBFIs operate in also can reduce the yield. But the risk is mitigated with NBFIs business models of aggressive selling channels at grass root levels and more relaxed regulatory requirements compared to LCBs making entry difficult for LCBs. From the cost drivers side the main risk comes from inflationary pressures of the economy but finance sector is relatively less affected compared to other resource dependent industries.

Source: LOSEC Research Source: LOSEC Research

Source: LOSEC Research Source: LOSEC Research

+2%

-2%

250

260

270

280

290

300

310

320

330

340

350

-1% 0 1%

Val

uat

ion

(L

KR

/Sh

are)

Change of Private Credit Growth Forecast

250

270

290

310

330

350

370

390

-1% 0 1%

Val

uat

ion

(L

KR

/Sh

are)

Change of Average Deposit Rate Forecast

250

270

290

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330

350

370

390

-1% 0 1%

Val

uat

ion

(L

KR

/Sh

are)

Change of Average Lending Rate Forecast

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290

300

310

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330

340

-1% 0 1%

Val

uat

ion

(L

KR

/Sh

are)

Change of Tax Rate Forecast

+4% -4%

-13%

+13%

+17%

-17%

+4%

-4%

The main risk for CFIN

stems from the changes in

credit environment



0

500,000

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3,000,000

0

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LK

R

Volume

Price

50 Day Moving Average

100 Day Moving Average

0

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09/09/11 12/09/11 03/09/12 06/09/12 09/09/12 12/09/12 03/09/13 06/09/13 09/09/13 12/09/13 03/09/14 06/09/14 09/09/14 12/09/14

RSI (14)

Appendices Table 04: Price Return (Annualized)

Graph 28: Share Price Movement

CFIN ASI Index S&P SL 20 Index PLC

3 months 3.63 -10.22 -22.11 57.96

6 months 21.71 9.88 5.45 104.08

1 year 32.44 19.28 17.12 74.91

3 year 12.19 11.09 10.66 28.31

Source: Bloomberg

Source: Bloomberg

Highest Price as at 12.09.2011: LKR.278.40

Lowest Price as at 28.05.2012: LKR 129.40



Graph 29: CFIN PE Ratio behavior Graph 30: CFIN PBV ratio behavior

Graph 31: CFIN price to sales ratio Graph 32: CFIN DPS and Dividend Yield

Graph 33: All Share Index PE ratio Graph 34: All Share Index PBV ratio

Source: Bloomberg Source: Bloomberg



2.8

1.74

1.34

1.26

1.14

1.02

14.75

12.69

9.95

5.00

5.50

6.00

6.50

7.00

7.50

8.00

8.50

28/03/13 28/09/13 28/03/14 28/09/14

PE Highest Average Lowest

8.20

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

1.25

1.30

28/03/13 28/09/13 28/03/14 28/09/14

PBV Highest Average Lowest

1.20

1.30

1.40

1.50

1.60

1.70

1.80

1.90

2.00

2.10

28/03/13 28/09/13 28/03/14 28/09/14

Price to Sales Highest Average Lowest

9.00

10.00

11.00

12.00

13.00

14.00

15.00

16.00

04/04/13 04/10/13 04/04/14 04/10/14

PE Highest Average Lowest

1.00

1.20

1.40

1.60

1.80

2.00

2.20

04/04/13 04/10/13 04/04/14 04/10/14

PBV Highest Average Lowest

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

2008 2009 2010 2011 2012 2013 2014

Div

ide

nd

Yie

ld

DP

S(L

KR

)

DPS Dividend Yield

6.57

5.77 0.90

1.08

1.26

1.45

1.67

2.04

14.72

13.27

14.44

2.03

1.73

1.52



Table 05: Forecast Financial Statements

Figures in LKR Mn FY 2011/12 FY 2012/13 FY 2013/14 FY 2014/15 (E) FY 2015/16 (F) FY 2016/17 (F) Income Statement Interest Income 7,510 9,772 11,926 11,982 12,926 15,069

Interest Expenses 2,663 4,069 4,730 4,600 4,639 5,373

Net Interest Income 4,847 5,703 7,196 7,382 8,286 9,696

Non-Interest Income 1,466 1,369 1,426 1,355 1,288 1,224

Net Revenue 6,313 7,073 8,622 8,737 9,574 10,920

Provisions for Loan Losses -88 201 1,214 462 533 622

Net Revenue After Provisions 6,401 6,871 7,408 8,275 9,041 10,298

Non-Interest Expense 2,600 2,823 3,578 3,910 4,272 4,668

Operating Income 3,801 4,049 3,830 4,365 4,768 5,629

- Income from Associates 495 616 699 782 874 978

- Net Non-Operating Gains -4 -45 57 58 60 61

PBT 4,292 4,620 4,587 5,206 5,702 6,668

Tax Provision 1,232 1,335 1,232 1,466 1,606 1,877

PAT 3,060 3,285 3,354 3,740 4,097 4,790

Minority Interests 95 68 63 85 93 109

Net Profit 2,965 3,217 3,291 3,655 4,004 4,681

Balance Sheet

Cash & Near Cash Items 356 689 571 458 471 456

Short-Term Investments 1,744 913 1,540 1,346 1,570 1,830

+ Accounts & Notes Receivable 1,208 813 919 1,021 970 922

Net Loans 38,154 44,318 48,342 55,831 65,097 75,902

Long-Term Investments 1,694 2,264 3,429 3,843 4,472 5,205

+investment in associates 3,746 4,047 5,467 5,795 6,143 6,512

Net Fixed Assets 2,011 2,365 2,719 3,116 3,571 4,092

Other Assets 885 1,148 2,443 1,623 1,870 2,157

Total Assets 49,798 56,557 65,430 73,032 84,164 97,076

Customer Deposits 22,795 26,985 32,673 33,498 39,058 45,541

+ Other Borrowings 8,000 7,627 6,409 9,014 10,185 11,496

+ Other Short-Term Liabilities 2,310 1,891 1,620 1,695 1,774 1,856

+ Other Long-Term Liabilities 2,170 2,533 3,010 3,150 3,297 3,450

Total Liabilities 35,276 39,036 43,712 47,358 54,314 62,344

+ Minority Interest 614 631 732 1,033 1,205 1,406

+ Share Capital & APIC 568 568 568 568 568 568

+ Retained Earnings & Other Equity 13,339 16,322 20,417 24,072 28,077 32,757

Total Equity 14,522 17,521 21,717 25,674 29,850 34,732

Total Liabilities & Equity 49,798 56,557 65,430 73,032 84,164 97,076

Source: Bloomberg and LOSEC Research



Table 06: Forecast Ratios Statements

Finance Ratios

Return on Assets 6.5% 6.0% 5.4% 5.3% 5.1% 5.2%

Return on Common Equity 23.9% 20.9% 17.4% 16.0% 15.0% 15.1%

Cost to Income Ratio 41.2% 39.9% 41.5% 44.8% 44.6% 42.8%

Net Interest Spread 10.2% 9.2% 10.9% 9.3% 9.2% 9.2%

Common Equity/Total Assets 27.9% 29.9% 32.1% 33.7% 34.0% 34.3%

Prov Loan Losses/Total Loans -0.2% 0.5% 2.5% 0.8% 0.8% 0.8%

Total Loans/Total Deposits 167.4% 164.2% 148.0% 166.7% 166.7% 166.7%

Total Loans/Total Assets 76.6% 78.4% 73.9% 76.4% 77.3% 78.2%

Deposits/Assets 45.8% 47.7% 49.9% 45.9% 46.4% 46.9%

Earning Assets/Int Bearing Liabilities 120.4% 124.6% 135.0% 145.4% 129.4% 134.6%

Growth Ratios

Interest Income Growth 19.5% 30.1% 22.0% 0.5% 7.9% 16.6%

Interest Expense Growth 13.1% 52.8% 16.3% -2.7% 0.8% 15.8%

Net Interest Income Growth 23.4% 17.7% 26.2% 2.6% 12.3% 17.0%

Net Revenue Growth 13.5% 12.0% 21.9% 1.3% 9.6% 14.1%

Net Inc Growth 62.3% 8.5% 2.3% 11.1% 9.6% 16.9%

Earning Assets Growth 26.9% 16.9% 11.1% 15.3% 16.6% 16.6%

Assets Growth 21.0% 13.6% 15.7% 11.6% 15.2% 15.3%

Net Worth Growth 27.6% 21.4% 24.2% 17.4% 16.3% 16.3%

Net Loan Growth 33.1% 16.2% 9.1% 15.5% 16.6% 16.6%

Deposit Growth 21.5% 18.4% 21.1% 2.5% 16.6% 16.6%

Earnings per share (LKR) 28.3 30.7 31.4 34.8 38.2 44.6

Book Value per share (LKR) 132.6 161.0 200.1 234.9 273.1 317.7

Source: Bloomberg and LOSEC Research



Company Central Finance Company PLC is a Non-Banking Finance Institute registered as a Licensed Finance Company under Central Bank of Sri Lanka categorization. CFIN operates in Sri Lanka having a widespread branch network across the country. CFIN’s primary operation is to provide wide range of financial services including leasing and hire purchases, deposit mobilization, loan disbursement, Micro & financing. Furthermore it has other business interests through subsidiaries and associate investment, but CFIN financial performance is dominated by its NBFI operations. Subsidiaries Company Line of Business % Holding Central Industries PLC Manufacture and distribution of PVC pipes

and fittings 50%

Central Mineral Industries (Pvt) Ltd. Manufacture of mineral products 100% Central Construction and Development (Pvt) Ltd.

Investment company 100%

Expanded Plastic Products (Pvt) Ltd. Investment company 100% Central Homes (Pvt) Ltd. Property development and sale of real estate 100% Mark Marine Services (Pvt) Ltd. Hydro power generation 58% Central Developments Ltd. Investment company 100% CF Insurance Brokers (Pvt) Ltd. Insurance broking 100% Central Transport and Travels Ltd. Hiring of vehicles 100% Hedges Court Residencies (Pvt) Ltd. Construction and sale of apartments 100% Dehigama Hotels Company Ltd. Renting of commercial property 80% CF Growth Fund Ltd. Investment company 100% Kandy Private Hospitals Ltd. Provision of healthcare services 67% Associates Company Line of Business % Holding Nations Trust Bank PLC Licensed commercial bank 20% Tea Smallholder Factories PLC Manufacture and sale of black tea 29% Capital Suisse Asia Ltd. Investment company 25%

Central Industries PLC Central Industries manufactures and markets a range of materials and products for water supply and drainage systems, electrical products and distribution of power tools. Its product portfolio consists of “National PVC’ one of the leading brands of PVC pipes. The Company also pioneered the production of stainless steel water tanks in Sri Lanka. Its electrical product portfolio marketed under ‘Krypton’ brand. CF Insurance Brokers (Pvt) Ltd. CF Insurance brokers provide insurance broker services primarily operating in general insurance segment with limited presence in life insurance. CFIB has 14.0% market share in general insurance business and 13.8% market share in total insurance (based on commission earned). Mark Marine Services (Pvt) Ltd. Mark Marine Services is a power plant operator, operating 2.5MW hydro power plant. Kandy Private Hospitals Ltd Kandy Private Hospitals operates a One of the premier hospitals in Kandy. Nations Trust Bank PLC Nations Trust Bank is a mid-size Licensed Commercial Bank in Sri Lanka providing range of banking services.



Capital Suisse Asia Ltd. Capital Suisse Asia Ltd was established as a Joint Venture with B.P de Silva Holdings (Pvt) Ltd in Singapore. Capital Suisse Asia is the holding company of Zyrex Power Ltd and High Tech Power Systems (Pvt) Ltd, which operate 3 Hydro Power plants with an installed capacity of 4.1 Mw. An environmentally friendly operation carried out with the least impact on nature, the power plants generate employment opportunities while supplementing power to the national grid. Tea Smallholder Factories PLC The company is involved in purchasing and processing tea and specialized in the manufacture of orthodox and CTC low grown teas, with many of the marks consistently achieving record prices.

Shareholder Number of Shares % Stake

1 Corporate Services (Pvt) Ltd. 16,895,461 16.11%

2 E. H. Wijenaike 16,164,123 15.41%

3 Employees' Provident Fund 11,109,455 10.59%

4 Thurstan Investments Limited 6,032,701 5.75%

5 Perpetual Capital (Pvt) Ltd. 4,819,592 4.60%

6 A.J. Wijenaike 3,271,357 3.12%

7 N.W. Wijegoonawardene 2,162,353 2.06%

8 G.S.N. Peiris 1,828,168 1.74%

9 B.P.De Silva Holdings (Pte) Ltd. 1,752,900 1.67%

10 C.R. Dunuwille 1,348,582 1.29%

11 N.M. Gunawardena 1,300,346 1.24%

12 J.B. Cocoshell (Pvt) Ltd. 1,278,379 1.22%

13 P.R. Munasinha 1,226,980 1.17%

14 Employees' Trust Fund Board 1,183,847 1.13%

15 P.M. Wijenaike 1,016,180 0.97%

16 R.E. Rambukwelle 984,906 0.94%

17 C. Kiriella 967,881 0.92%

18 The Ceylon Investment PLC 915,969 0.87%

19 S.K. Wedande 852,329 0.81%

20 A.K. Gunaratne 835,274 0.80%

Others 28,936,550 27.59%

Total 104,883,333 100.00%

Graph 35: Shareholder Structure 1 Graph 36: Shareholder Structure 2


Individuals 52%

Institutions 48%

Foreign 12%

Local 88%



Key Management (Source: Company Annual Report 2013/14) Eranjith Harendra Wijenaike / Managing Director Eranjith Wijenaike is a Director of several companies within and outside the group including Tea Smallholder Factories PLC, Trans Asia Hotels PLC, Equity One PLC and Central Industries PLC. He served as a founder Director of Nations Trust Bank PLC for a period of 12 years and retired in December 2011. He has over 30 years of experience and holds a Bachelor’s Degree in Commerce and a Postgraduate Diploma in Finance and Management. He is a Member of the Chartered Institute of Management (UK). Gerard Shamil Niranjan Peiris / Director (Finance) Shamil Peiris serves on the Boards of many companies within and outside the group. He possesses over 36 years of post -qualification experience. He is a Fellow of the Institute of Chartered Accountants of Sri Lanka, Institute of Credit Management & Society of Certified Management Accountants – Sri Lanka, Chartered Institute of Management Accountants, British Institute of Management and Association of Corporate Treasurers - UK. He is also a Chartered Global Management Accountant. Ravindra Erle Rambukwelle / Director (Marketing and Operations) Ravi Rambukwelle possesses over 35 years of management experience, both locally and internationally. He holds a Bachelor’s Degree in Economics and Political Science from the University of Peradeniya, a Diploma in Marketing from the Chartered Institute of Marketing UK and a Diploma in Commerce from the Institute of Commerce UK. He serves as a Director in several group companies including Tea Smallholder Factories PLC and Central Industries PLC. Arjuna Kapila Gunaratne / Director (Group Coordination) Arjuna Gunaratne oversees the functions of Strategic Planning and Risk Management of the company. He is a Fellow of the Institute of Chartered Accountants of Sri Lanka and the Chartered Institute of Management Accountants of UK. He is also a Chartered Global Management Accountant. He was a Board member of Nations Trust Bank PLC and served as Chairman from 1st November 2012 to 30th April 2014. He also serves on the Board of Central Industries PLC. Dhammika Prasanna de Silva / Director (Credit) Prasanna de Silva a member of the Board of Directors since 1st July 2011. He has served as the Chairman of the Leasing Association of Sri Lanka from 2007 to 2009. At present, he is an advisor to the Association. He also serves as a Member of the Telecommunications Regulatory Commission of Sri Lanka and a director of Nations Trust Bank PLC. He is a Fellow of the Chartered Institute of Management Accountants (UK) and has also completed all examinations of Chartered Financial Analyst (CFA) programme. History CFIN was founded by Mr. Chandra Wijenaike in 1957 as a private limited liability company, Central Finance Company commenced operations by providing financial services in the form of hire purchase facilities to the passenger transport and goods haulage targeting the Central region of the country. It has branched out of central region since then becoming one of the oldest and well established financial entities in the country offering wide range of financial services including Asset Leasing, Savings and Deposits, Contract Hire, Fleet Management, Micro Finance and SME lending. In 1969 the company was converted to a public company with a quotation from the Colombo Brokers Association and remains one of the oldest listed corporations in Colombo Stock Exchange. In 1999 a strategic partnership between John Keells Holdings and Central Finance to acquire the Colombo Branch of Overseas Trust Bank led to the establishment of Nations Trust Bank Plc, which has become one of the leading midsize LCBs in the country. CFIN has also diversified in to non-financial segments including manufacturing of PVC products, healthcare, power, real estate and tea manufacturing. CFIN also has an insurance brokering operation which it pioneered in 1986 and currently has the highest market share in terms of commission earned.



Non-Banking Finance (NBFI) Sector In Sri Lanka financial sector is dominated by Licensed Commercial Banks accounting to half of financial sector assets. LCBs are wide spread across the country but are fairly conservative in its product disbursement with regulatory restrictions and higher asset quality compared to more aggressive NBFIs. NBFIs, even though accounts to small portion of financial sector assets, plays a significant role in the financial sector of the country providing financial products to the clients who may not have access to traditional banking products.

Graph 37: Financial Sector Asset Breakdown

Currently there are 47 NBFIs in the country (As at October 2014), but the number will reduce significantly with the ongoing financial sector consolidation process which started in January 2014. CBSL has identified the systematic risk of having too many small NBFIs and has given guidelines to increase the minimum core capital of NBFIs to LKR 1.5 billion. As of January 2014 only 19 companies had core capital more than LKR 1 billion, which gives an indication on reduction of number of NBFIs in the country with the financial sector consolidation plan. Despite existence of several finance companies, the sector is dominated by large players with largest 6 NBFIs account to about half of total assets of the NBFI sector. These large NBFIs has grown rapid in last few years promoting high yielding products such a leasing and hire purchase, becoming large corporate entities. The asset quality of these large players also has improved significantly and most of these companies have investment grade credit ratings. But contrastingly smaller finance companies have weaker asset quality making them vulnerable to credit environment of the country. Funding of NBFIs mainly dependent on customer deposits and deposits accounts to 47% of total liabilities of NBFIs (as at 31st December 2013). Deposits are mainly consisted of high cost time deposits making cost of funds comparatively high for NBFIs. But large NBFIs with strong franchise and credit profile have been able to attract deposits at significantly low interest rates. Selected Indicators of Non-Banking Finance Sector (As at end Aug 2014) Indicator Value Total Assets (LKR billion) 781.1 Loans & Advances (LKR billion) 594.2 Deposits (LKR billion) 397.4 Borrowings (LKR billion) 177.6 Tier 1 Capital Adequacy Ratio (%) 13.7 Total Capital Adequacy Ratio (%) 14.5 Gross NPA (%) 7.6 ROA (Before Tax) (%) - Annualised 2.5 ROE (After Tax) (%) - Annualised 10.2 Liquid Assets to Total Assets (%) 9.4 *Company Overview, Industry, Key Management, History are taken from the extracts of Website, Annual Reports Central Bank of Sri Lanka and LOSEC Research materials

12.10%

48.70% 8.90%

6.30%

12.60%

3.50% 7.90%

Central Bank

Licensed Commercial Banks

Licensed Specialised Banks

Licensed Finance Companies

Employees’ Provident Fund

Insurance Companies

Other

Source: CBSL



SWOT Analysis Strengths - Strong Franchise, well known across the country - Island wide branch network to deliver the products - Sound credit outlook, Investment grade credit rating - Robust asset quality - Convenient access for funding Weaknesses - Less diverse asset portfolio with heavy reliance on Leasing and HP products - Dependence on deposit financing - Asset liability maturity mismatch. Opportunities - Increased per capita income will give avenues for new product innovations - Economy’s transition to low interest environment can drive the credit growth - Financial sector consolidation program can result in opportunities for inorganic growth Threats - New players (especially banks) entering into CFIN’s main business segments - Rising competition of existing players - Financial/Credit market crashes



Recommendation Guidance

BUY – expected return > 10% in excess of benchmark return

SELL – expected return less than benchmark return

HOLD – expected return between 0% and 10% in excess of benchmark return

Investment Horizon: 3 years

Benchmark Interest Rate: Average Weighted Fixed Deposit Rate (AWFDR) published by Central Bank of Sri Lanka.

Risk Level Evaluation

High: Maximum price volatility to be up or down more than 50% monthly

Medium: Maximum price volatility to be up or down between 25% - 50% monthly.

Low: Maximum price volatility to be up or down less than 25% monthly.

Risk Level is calculated taking the historical standard deviation measures.

Financial Glossary / Acronyms

EPS = Earnings per Share

ROA = Return on Assets (adjusted net profit/average total assets)

ROE = Return on Equity (adjusted net profit/average total equity)

CAGR = Compound Annual Growth Rate

((End Value/Start Value) ^ (1/number of years) -1)

GP= Gross Profit

EBITDA= Earnings before interest, tax, depreciation and amortization

PBT= Profit before tax

PAT= Profit after tax

NP= Net Profit

PBV= Price to book value ratio

PE= Price to earnings ratio

NBFI= Non-Banking Financial Institutes/Licensed Finance Companies

LCB= Licensed Commercial Bank

HP= Hire Purchase

NIM= Net Interest Margin

NPA/NPL= Non-Performing Advances

CSE= Colombo Stock Exchange

LOFC= Lanka ORIX Finance Company PLC

LFIN= LB Finance PLC

PLC= People’s Leasing & Finance PLC

CLC= Commercial Leasing & Finance PLC

COCR= Commercial Credit & Finance PLC

COMB= Commercial Bank of Ceylon PLC

NDB= National Development Bank PLC

SEYB= Seylan Bank PLC

HNB= Hatton National Bank PLC

SAMP = Sampath Bank PLC

UBC= Union Bank of Colombo PLC

PABC= Pan Asia Banking Corporation PLC

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