SINGAPORE (Oct 17): KGI Securities is initiating coverage on IFS Capital with a “buy” recommendation and a target price of 29 cents.
In a Wednesday report, analyst Joel Ng says, “We believe that the turnaround story for IFS Capital has reached an inflexion point, as the company’s profits swing back into the black in 2017 on higher revenue and lower impairment.”
The group appointed new management in 2015 and has since successfully grown it lending business, reduced NPLs and implemented good risk management process in preparation for further growth.
Going forward, the analyst expects IFS to strengthen its balance sheet further and increase its core business of SME financing.
The group’s current management has implemented risk management systems with more stringent criteria, reducing default rated over the past two years. This had a direct impact on the firm’s profitability as loan provisions dropped 56% y-o-y to $8.4 million in 2016 and another 58% y-o-y to $3.5 million in 2017.
However, the group’s bottom line was hit by its insurance segment, as net claims increased 360% to $10.8 million in 2017, driven by insurance products in the automobile space.
The management has since revamped the business and Ng expects net claims to gradually decline.
According to KGI, SMEs play an important part in local economies, accounting for 30-60% of Asean countries’ GDP and employing 60-90% of the workforce. But due to low-risk appetite of banks and the lack of credit information, SMEs are underserved by major financial institutions.
IFS has been financing SMEs for more than 30 years and the analyst believes that the group is well-positioned to grow alongside companies in key Asean countries, such as Singapore, Thailand, Indonesia and Malaysia.
“As a result of the renewed focus on its SME financing business, both factoring receivables and volumes have grown by around 10% per annum since 2015,” says Ng.
As at 12.10pm, shares in IFS Capital are trading 2 cents or 9.52% higher at 23 cents. This gives the stock a FY19 price-to-book value of 0.5 times with a dividend yield of 2.0%.
