AFG Home Loans continues to be the most pleasing segment
Profit before tax for the AFG Home Loans (AFGHL) business segment increased 97% from 1H17 to 1H18. AFGHL settlements increased by 31% over this period. Underlying profit growth in this segment was also driven by improved net interest margin (NIM). Headline growth benefitted from implementation of an actuarial assessment of the AFGHL trail book in accordance with Australian Accounting Standards in 2H17.
Special dividend the highlight
The announcement of a special dividend of 12 cents per share is the highlight of the result. As we have regularly highlighted, AFG has built up a strong unrestricted cash position as a result of strong organic cash flow generation, and this has paved the way for the special dividend. We did however anticipate an acquisition being made (rather than a special dividend). AFG has implied that it has struggled to find acquisition opportunities which satisfy its accretion and strategic criteria. This provides us with comfort that the company is strongly focused on creating shareholder value and will not make an acquisition just for the sake of growth.
Strong growth in the AFGHL business is delivering higher margin revenue and stronger cash flow generation. This will boost support to the unrestricted cash position and will mean that AFG will remain well poised to avail itself of any shareholder-value-creating acquisition opportunities. In the absence of acquisitions, there is potential for special dividends to be paid from time to time. We expect white label residential settlements growth will remain strong over our forecast period.
Investment view and changes to forecasts
We have increased our normalised EPS forecasts by 5.3% in FY18F, 7.1% in FY19F and 10.2% in FY20F, largely due to stronger forecast growth in white label settlements. These upgrades, combined with a precedent now being set for the payment of special dividends as well as the potential for acquisitions, results in an increase to our share price target (clients can login to view).
Key downside risks include regulatory restrictions being introduced for white label products and lower-than-expected residential settlements activity.
We retain our Add recommendation.
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