Global Investment House – Commercial Facilities Company (CFC)- Commercial Facilities Company (CFC) is a Kuwait-based shareholding company specializes in consumer finance by providing installment credit facilities for new and used cars, marine equipment, furniture and electrical appliances. The Company also offers services such as consumer loans, commercial loans, cash loans and some basic material loans. It offers its services through a number of branches located in Kuwait city, Hawalli, Riggae and Al Jahra.
Based on the current market price of 285 fils/share (as on May 12, 2009), CFC is trading at a 2009E P/E and P/BV multiple of 9.5x and 1.0x respectively. Our estimated value for CFC scrip is worked out to be 355fils based on DDM (80%) and peer group relative valuation approach (20%). According to our fair value the company scrip offers an upside of 24.6% on the closing price of 285fils per share; we therefore recommend a BUY on the scrip.
Financial Performance
Commercial Facilities Company (CFC) posted a net profit of KD15.2mn in 2008, exhibiting a decline of 58.2%YoY in the bottom-line of the company. The decline in profits was directly attributed to the investments losses amounted to KD7.2mn in 2008, which was normal, given the collapse of financial markets around the world. Still, the company’s profits have outperformed the overall market, and also its sector.
Despite the credit crunch late in 2008, the company has been able to increase its gross profits (income from credit installment minus cost of borrowing) by 5.0%. The cause for increasing gross profits was directly attributed to the increase in spread between lending rate and borrowing rate. The interest-bearing loan portfolio for Commercial Facilitates constituted 40.8% Kuwaiti Dinar, and the rest (59.2%) was USD denominated. In addition, the company was able to lower its operational expenses by 1.4% in 2008 to reach KD4.4mn. This decrease in expenses, coupled with gross profit increase, enabled the company’s to experience a growth in operating income by 5.6% to reach KD27.2mn.
Assets continued its growth in 2008, increasing from KD381.7mn to reach KD400mn, a growth rate of 4.8%. The major asset that constituted 80.5% was the net installment debtors, which decreased last year because of an increase in provisions combined with a decrease in loans originations. This decline in loan origination is one of the precautionary moves by management to weather the financial troubles. Besides, the company’s cash holding jumped by more than 11 times from KD2.1mn in 2007 to reach KD24.7mn in 2008, which also shows the conservatism strategy followed by company during turbulent times.
This growth was financed by the growth in liabilities which increased by 14.6% from KD217mn in 2007 to reach KD249mn in 2008. On the other hand, shareholder’s equity decreased by 8.2% over the same period. This decline in equity was mainly due the distribution of dividends (KD 24.9mm) more than the profits (KD 15.2mm in 2008) the company has earned last year.
Outlook
The credit market in Kuwait is going through challenging times, but these troubles are mainly concentrated in the corporate lending sector. Consumer credit is less affected by the crisis. Besides, most of CFC’s clients are Kuwaiti nationals, of which approximately 80% are employed by the government sector. Thus, the client base for CFC still enjoys a strong income stream that would enable them to continue borrowing. However, there will be some consumer segments being affected by the crisis, given the decline in wealth resulted from financial assets value fall, especially in the stock market. Still, this wealth decline will not be substantial to severely hurt the consumer credit market.
The new financial stability law will provide protection for only banks, leaving out many credit lenders, such as, CFC. However, some investments companies will be able to benefit from the law, but they will have to accept the tight requirements imposed by the law. Therefore, we do not think CFC will apply to benefit from the government aid of KD1.5bn aimed for investment companies. Nevertheless, CFC will still be able to benefit from this law indirectly. The benefit will come in the form of a better credit environment. Besides, liquidity will be more available than it was in the midst of the credit crunch.
Investment Indicator
Price (May 12, 2009) - fils Shares in issue (mn) Market Cap - KD mn 52 - week price range
285 536.8 153.0 250 - 550 fils
Year Operating Revenues Operating Profit Net Profit EPS BVPS ROAA ROAE P/E P/BV
(KD mn) (KD mn) (KD mn) (fils) (fils) (%) (%) (x) (x)
2010F 42.1 28.0 24.4 45 316 6.2% 14.9% 6.3 0.9
2009F 39.8 26.9 16.0 30 293 4.1% 10.4% 9.5 1.0
2008A 42.5 27.2 15.2 28 281 3.9% 9.7% 13.2 1.3
2007A 44.1 25.8 36.5 68 306 9.7% 23.6% 8.0 1.8
Source: Global Research.
Historical P/E & P/BV multiples pertain to respective year -end prices, while those for future years are based on closing prices on the KSE as of May 12, 2009.
