Stock Watch: Housing Finance Co (K) Ltd

Housing Finance Co (K) Ltd (NSE: HFCK) announced their audited results for the period ended 31^st December 2014 on 27^th March 2015.

Recommendation: HOLD – KES 37.20 (Downside – 0.2%)

4.2% Decline in Pre-Tax; 38.4% Retreat in Non-Funded Income

HFCK announced 4.2% decline in pre-tax profits to KES 1.42 billion impaired by 38.4% attrition in non-funded income to KES 0.84 billion from KES 1.37 billion. Net interest income shored up by 18.8% to KES 3.03 billion following 17.2% rise in total interest income to KES 6.37 billion buoyed by positive market reception of the Ezesha home loans product.   HFCK reported 28.5% growth in loans and advances to KES 45.24 billion up from KES 35.22 billion during a similar period last year on the back of increased lending capacity from a 19.4% rise in borrowed funds. However, customer deposits grew at a much faster rate of 36.2% (y-o-y) to KES 36.11 billion, to lower loan-to-deposit ratio from 132.9% to 125.3% (FY14). The lender published a 96.2% rise in borrowed funds which accounted for 31.5% of total liabilities while customer deposits took the larger share of 66.4%.

Gross NPL Ratio at 8.8%; C-I-R Falls to 49.2%

Gross NPL ratio rose marginally to 8.8% in FY14 vis-à-vis 8.6% (FY13) however, the ratio is expected to improve once the effect of reforms at the land registry trickles down to the real estate sector.

HFCK announced a net profit of KES 0.98 Billion, 2.0% decrease from last year’s KES 1.00 Billion. Total operating expenses were up 0.7% to KES 2.46 Billion bogged down by 96.2% rise in loss provisions and 22.6% increase in employee costs. Cost to income ratio improved significantly to 49.2% from 55.1% in 2013.

DPS Falls 14.3% to KES 1.50; Cheap Valuation Multiples

Dividend per share declined by 14.3% to KES 1.50 representing a payout ratio of 36.3% and a dividend yield of 4.0% with an EPS of 4.21 and a closing price of KES 37.50 (27/03/2015). Management set Friday 8^th May 2015 as the counter’s book closure date with payment to be facilitated on or about 5^th June 2015. The mortgage financier has shed 18.0% YTD following announcement of a 1-for-2 KES 3.50 billion cash call in February (KES 45.75 – 31/12/2014).  Investors stand to gain from higher returns unlocked gauging its cheap valuation multiples of P/E and P/B of 8.9x and 1.35x vis-à-vis industry average of 10.83x and 2.46x respectively.

Outlook: Higher Uptake in Mortgage Financing following KBRR: Following disclosure of its highly successful KES 3.5 Billion cash call, proceeds are expected to boost the lender’s capital reserves, following buoyancy of Basel II regulation, and fund its growth and expansion strategy in the local segment. Moreover with the government’s concerted push for a lower interest regime whereby KBRR shed off 59bps back in January, higher disposable incomes in the middle class bracket should spur appetite for mortgage financing.