IFS Capital Ltd - CIMB Research 2018-04-04: Financing Specialist For SMEs

IFS Capital Ltd - CIMB Research 2018-04-04: Financing Specialist For SMEs IFS CAPITAL LIMITED I49.SI

IFS Capital Ltd - Financing Specialist For SMEs

  • IFS Capital (SGX:I49) is a financial institution that provides factoring, hire purchase and leasing to small and medium-sized enterprises (SMEs), as well as bonds, guarantees and insurance.
  • Its net profit contraction reversed after four years of losses, rising to S$3.6m in FY17 on the back of higher revenue and lower provision for loans losses and impairment.
  • IFS aims to expand its core factoring and lending businesses in Singapore, Thailand, Malaysia and Indonesia, as well as build digital platforms to complement operations.
  • Strata-owned Suntec office unit could bring in c.S$19m or S$0.05 per share when its value is unlocked, based on company estimates.
  • IFS now trades at historical 0.65x FY17 P/BV vs. local peer average of 0.68x.

Funding small and medium businesses since 1987 

  • IFS Capital was listed on SGX’s Mainboard in Jul 1993. Established in 1987, the Singapore-based group offers factoring and other financing facilities to small-and-medium enterprises (SMEs) and has operations in Singapore, Thailand, Malaysia and Indonesia.
  • IFS also provides bonds and guarantees, credit and general insurance through its wholly-owned subsidiary, ECICS Limited., IFS Capital (Thailand), another IFS subsidiary, is listed on the Stock Exchange of Thailand.

Net profit swings back to black in FY17 after cut in unsecured loans 

  • IFS Capital reported net profit of S$3.6m in FY17 after being saddled with net losses in FY13-16 primarily due to high provisions for loan losses and asset impairment. Following a change in CEO in Oct 2015, IFS underwent internal restructuring to reduce its unsecured credit exposure and revert focus to its core business of factoring. 
  • Management guided for minimal provisions for loan losses ahead, as the company has shifted away from unsecured lending and factoring has a low loss ratio of under 1%.

Building digital platforms to stay ahead of rivals 

  • IFS Capital plans to build digital platforms to support its Singapore operations and expects them to be up by end-2018F. According to management, this would reap savings in operational costs and boost efficiency, enabling IFS to scale up domestic business expansion. The digital platforms would also facilitate centralised credit risk assessment in its operations.

Could unlock significant value from strata-owned Suntec office 

  • IFS Capital ’s 14,381 sq ft strata-owned Suntec office unit was valued at S$33m in 2016 by DTZ assessment and the company estimates this property could bring in substantial gain of c.S$19m or S$0.05 per share when sold. 
  • Apart from the Suntec office unit on its book, IFS also owns two freehold properties – a residential apartment in Melaka, Malaysia and office units measuring a total of 11,492 sq ft in Bangkok, Thailand.

Growing pool of Singapore SMEs with financing issues 

  • A survey by DP Information Group found that 35% of Singapore SMEs had finance-related issues in 2017, of which the bulk comprised cash flow problems related to delays in payment from customers. This represents a growing pool of SMEs for IFS to tap on, with Singapore contributing c.57% of FY17 operating revenue.

Key risks 

  • Higher interest rates would raise IFS’s funding costs and reduce interest rate spreads earned by its loans business. IFS also faces competition from banks and crowdfunding platforms.
  • Historical valuation IFS is trading at a 0.65x FY17 P/BV versus local peer average of 0.68x. Its historical FY17 P/E is 51x. IFS declared FY17 DPS of 0.3 Scts, representing 1.1% dividend yield.

Factoring solution for cash-strapped SMEs 

  • Based on a 2017 survey conducted by DP Information Group (DP Info) on 2,522 SMEs in Singapore, more than one-third of SMEs (35%) faced finance-related issues in 2017, compared to 22% of SMEs in 2016. Of the 35% that faced finance-related problems, around 81% experienced delays in payments from customers that increased cash flow risk and working capital problems.
  • SMEs approach IFS for financing via factoring, whereby SMEs obtain immediate cash financing in exchange for giving up control over their accounts receivable, mainly to tide them over periods of tight cash flow related to working capital.

Target Price: N/A

Colin TAN CFA CIMB Research | William TNG CIMB Research | http://research.itradecimb.com/ 2018-04-04
CIMB Research SGX Stock Analyst Report NOT RATED Maintain NOT RATED 99998 Same 99998

* This Eyes On the Ground report represents a preliminary assessment of the subject company, and does not represent initiation into CIMB's coverage universe. It does not carry investment ratings and CIMB does not commit to regular updates on an ongoing basis.