Nov 25, 2010

Attractive valuation, multifinance stocks

From a valuation perspective, multifinance companies represent the most attractive segment of financial services in Indonesia.
The combination of improving credit metrics, historically low interest rates, tame inflation and robust demand will drive this industry’s valuation to close its gap with banks. Historically, multifinance firms trade at a valuation discount of 58% and 43% on PE and PBV to banks respectively.
"We anticipate this valuation gap closes due to the attractive operating environment fuelled by attractive interest rates, low NPL’s and increasing leverage," said a research on multifinance sector published by CLSA Asia-Pacific Markets recently.
The multifinance industry in Indonesia represents an attractive investment opportunity. The industry represents over 10% of total loans in the nation and is the key driver in providing access to transportation to the public namely via ownership of cars and motorcycles.
Historically low interest rates, improving NPL metrics, tame inflation and robust demand for autos and motorcycles will drive higher profitability metrics.
Segment underutilization of leverage since the Asian financial crisis is coming to an end. This will drive ROE higher.
Multifinance firms were leveraged nearly 10x in 1996 and today are leveraged on average 3.3x.
Motorcycles and autos represent the majority of segment revenues, with ten year unit sale CAGR’s of 21% and 9% respectively.
Since 2005, Indonesian multifinance firms shares have traded at a discount of 58% and 43% price to earning ratio (PE) and price to book value ratio (PBV) to their bank peers.
The attractive industry demographics, low rates and improving NPL’s justifies compression of the valuation gap.
Inexpensive versus regional peers in India and Thailand while offering higher ROE and lower leverage.
Multifinance companies in Indonesia either have a bank that they channel loans to or are stand alone firms. 
Mandala Finance
PT Mandala Multifinance Tbk (MFIN)'s majority shareholder, Alex Hendrawan holds the master license for Yamaha in Lampung and owns a number of Yamaha dealerships in Java.
In addition to the business generated from Hendrawan, Mandala's 152 branches are tapping into rural demand for motorcycles, in areas with less competition. Currently, MFIN is trading at PBV of 1.4x and PE of 6.7x with an ROA and ROE of 4.4% and 22.9% respectively.
Mandala Multifinance was founded in 1983 under the name PT Vidya Notices Leasing Corporation and underwent multiple name changes until 1997 when it became know as Mandala Multifinance.
Mandala’s majority shareholder, Alex Hendrawan holds the master license for Yamaha in Lampung and owns a number of Yamaha dealerships in Java.
Given this relationship, a majority of Mandala’s financing is through Yamaha dealerships, with Honda representing a distant second.
Through its owner, Mandala has direct access to many dealerships in the Java area and in Lampung which help drive customers to the firm.
Moreover, through its 152 branches Mandala is tapping into rural demand for motorcycles, in areas with less competition.
The company does a solid job managing its NPL’s, part of this is because the person responsible for collecting the loan if it were to go NPL also must approve the loan before it is released.
Mandala’s greatest challenge is not having a bank to channel loan production to and to use as a source of lower cost funds.
Currently, Mandala relies solely on bank loans to fund its business, implying a higher cost of funds and the risk that lines can be cut in difficult times.
In addition, as motorcycle buyers are typically sensitive to commodity prices due to their jobs and income, Mandala has a higher risk of sustaining greater losses than peers in a weak economic environment.
New lending through 9M10 totalled Rp3.0 trillion, and is anticipated to increase to near Rp4.0 trillion by year end.
Mandala is offering financing for new and used motorcycles only. Moreover, MFIN employs more leverage than peers, with assets/equity at 6x, but the company can continue to leverage higher, as this figure remains low versus regional peers.
Currently, MFIN is trading at PBV of 1.4x and PE of 6.7x with an ROA and ROE of 4.4% and 22.9% respectively.

Disclosure: No position at the stock mentioned above. 
 
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