Global Investment House – <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />Kuwait – Equity research update - on (Bahrain CFC)- Bahrain Commercial Facilities Company (BCFC) continues to focus and develop its consumer finance business in the past few years with the increasing competition in the market. However, the latest developments in the consumer finance market have helped the company the most in this industry. Most of the competitors seems to have lost business while abiding by the new regulations laid by BMA, however, this is not the case when we look at BCFC. This is attributed to the fact that the company was already following these regulations as it has stricter policies in lending to the consumer finance. The successful implementation of the BMA rules have allowed the company to bring in BD53mn in the form of new business (new loans) for the year 2005, which is also far better looking at the consumer finance market. BCFC continued to focus on its target customers i.e. Bahraini citizens to drive its business growth. BCFC’s client base increased to about 17,000 at the end of 2005 from 15,000 as of Dec 2004, due to continued high customer retention rate owed to better lending terms coupled with fast loan processing.
Keeping in line with the improved performance of BCFC and our expectations about its future potential, we have valued BCFC’s share price at 677fils. The stock currently trades at around 700fils, which implies that the value arrived at by using the DDM model is around 3.3% lower than the current market price. Hence, we recommend a “HOLD” on the stock with a medium term perspective.
Financial Performance FY-2005
BCFC has continued to build one of the highest quality credit portfolios among its peers in the Bahraini market over the years. The company is well focussed on Bahraini nationals as its target market and has continued to lead the consumer finance business in the country by serving around 17,000 customers at the end of 2005. Notwithstanding its strict lending policies BCFC has been able to increase its total outstanding customers from 15,000 in 2004 to 17,000 in 2005. The company has been diversifying its revenue stream over the years to maintain the core business, which is the consumer finance segment around the 40%-50% mark of the total revenue, which is also the target for the company. In doing so the company has increased its emphasis on the other three segments, which are automotive sales, real estate and the insurance.
In the year 2005, the consumer finance or the parent company accounted for 46.2% of the total revenue, where as the other three segments collectively accounted for 53.8%. The average exposure per customer, based on the value of originated loans is around BD5,853 with one of the highest maturity period of 7 years. The quality of the portfolio continued to benefit from the sound underwriting standards and efficient collections and recovery functions enforced by the company. The non-performing loans of the company increased from BD2.25mn in 2004 to BD3.05mn in 2005. Though the NPLs of the company increased in 2005, we don’t see it as a major concern in the medium term. As a percentage of total loans portfolio, NPLs stood at 3.06% in 2005 as compared to 2.41% in 2004. In 2005, the company has provided for 96.9% of its NPLs in 2005 as compared to 122.1% in 2004.
The cost of borrowing is one of the major determinant of profitability for its consumer lending business since around 68% of its assets are financed through bank debts and bonds. Having conservative credit policies in addition to a long track record of consistently good performance, the company’s bargaining power with the commercial banks has increased over the years as it is able to borrow at highly competitive interest rates compared to its competitors. However, the inability to raise customer deposits puts BCFC at a disadvantage compared to the commercial banks, who enjoy the benefit of low cost funding.
The policy of the company is to finance its consistent balance sheet growth via diverse funding sources whose maturities are well spread out to mitigate the impact of liquidity risk. Around 58.7% of the asset base in 2005 was funded through a mix of term loans, bonds and bank overdrafts. The term loan of the company declined by 6.1% as compared to 2004 to BD56.67mn in 2005. On June 15th, 2005 the company issued BD10mn bonds to pay off a bond maturing in 2006. The company has a mix of both fixed and floating rates in lending to the customer, but the entire funding by the company is based on floating rates. In order to mitigate the interest rate risk, the company has entered into interest rate swaps and caps.
First Quarter Results – 2006
BCFC’s earnings in the first quarter of 2006 improved by 12.88% to BD1.67mn as compared to BD1.48mn recorded during the same period last year. The earnings per share of the company stood at 15.4fils for the first quarter ended March 2006. The consumer finance business of the group made steady progress as the interest income of the group improved by 9.1% to BD2.60mn, while the rising interest rates caused interest expense to jump by 24.4% to BD0.99mn, despite hedging the interest rates. The parent company reported a decline of 5.7% in its bottom-line to BD1.09mn as compared to BD1.16mn during Q1-2005.
The automotive business of the company continued to show impressive performance during the first quarter of 2006, reporting an increase of 9.1% in its sales to BD10.48mn. However, at the same time the cost of automotive sales rose by 6.1% to BD9.02mn. NMC reported a net profit of BD0.52mn compared to BD0.31mn reported in Q1-2005, an increase of 68.7%. Tas’heelat Insurance Services Company has shown continued growth over the last few years. The company reported a revenue of BD0.13mn compared to BD0.12mn in the first quarter of 2005 while its bottom-line surged by 21.9% to BD0.089mn. The real estate business of the company failed to contribute to the Group’s bottom-line. The turnover of Tas’heelat real estate dropped by 64.3% to BD0.015mn as compared to BD0.042mn in the same period previous year. It reported a loss of BD0.027mn during the period, which is higher than the loss reported during the same period last year.
The total assets of the company stood at BD129.54mn at the end of Q1-2006, representing an increase of 3.3% over the end of 2005. The increase in the asset was mainly from the loan and trade receivable, which grew by 7.0%. Inventories mainly comprising of automotive stock and land held for resale declined by 19.8% to BD11.67mn as compared to BD14.54 at the end of 2005. The decline was mainly in the automotive stock, while the land held for resale remained at the level of 2005.
Growth Drivers
Favorable economic environment – Healthy economy….
The growth in Bahrain is mainly driven by public spending. Robust government spending, prompted by exceptionally strong oil revenue, will stimulate private consumption and will help to bolster business confidence. The continued government support to the economic reforms has resulted in the improvement in various sectors of the economy. However, the prevailing high oil prices will play a much bigger role in pushing the economy to a high growth trajectory in the coming years.
Consumer finance market – still room for growth…..
BCFC has been a dominant player in the consumer credit market in Bahrain over the years and plays a significant role in driving the industry. It has maintained a healthy market share in the market over the years despite the intense competition faced by the commercial banks. Although, the consumer credit market has shown positive growth during the last few years, it still has huge potential to grow in the medium term. However, the sharp spike in interest rates in future might prove to be a dampener, in addition to the small size of the consumer finance market in Bahrain. The management is exploring regional expansions and further diversification of business into complementary areas. However, these will take a while to materialize as the company is expected to be cautious and will look for the right kind of opportunity in the region.
The escalation of the real estate prices in recent months may not give substantial appreciation on its real estate portfolio. The contribution from brokerage and commission activities is expected to be significant, going forward. Inventory of land at the end 2005 and the real estate services will continue to show positive earnings, although it should be noted that the profits from this the real estate segment in 2006 will not be as seen in the year 2005. Bahrain real estate sector is well poised for growth as there has been initiatives from the government to further drive the sector by allowing foreign ownership. This will continue to create demand for real estate in the near future and we expect the company to continue benefiting from this booming real estate market in Bahrain.
Bahrain Commercial Facilities Company at a Glance
|
Price June 5th, 2006 |
Shares in Issue |
Market Cap |
52-week price range | ||||
|
700 fils |
108,290,000 |
BD75.80mn |
700-1,010 Fils | ||||
|
|
Operating Profit BD’000 |
Net Profit BD’000 |
EPS (fils) |
Book Value (fils) |
ROAE |
P/E (x) |
P/BV (x) |
|
2007 E |
13,902 |
7,460 |
68.9 |
263.4 |
20.82% |
10.16 |
2.66 |
|
2006 E |
12,629 |
6,666 |
61.6 |
252.2 |
28.03% |
11.37 |
2.78 |
|
2005 A |
13,904 |
8,102 |
82.0 |
266.7 |
28.83% |
11.47 |
3.52 |
|
2004 A |
11,556 |
6,636 |
67.1 |
221.9 |
27.31% |
11.92 |
3.61 |
Historical P/E & P/BV multiples pertain to respective year-end prices, while those for future years are based on market price in the Bahrain Stock Exchange as on June 5, 2006.
Source: BCFC “Actuals” and "Global’s" Estimates
Keeping in line with the improved performance of BCFC and our expectations about its future potential, we have valued BCFC’s share price at 677fils. The stock currently trades at around 700fils, which implies that the value arrived at by using the DDM model is around 3.3% lower than the current market price. Hence, we recommend a “HOLD” on the stock with a medium term perspective.
