AFC - High Growth - Low p/e. (New code CAF)

[Alban]

Alliance Finance Corporation - High Growth, Low p/e.

AFC makes its money by financing the ever-increasing cost of insurance to businesses. Businesses benefit by spreading the (often large) costs of insurance through the year, providing smoother cashflow.

AFC is a small company, market cap only $16.5 million, which currently has 6% of the $2 billion p.a. IPF market in Australia. (IPF = insurance premium funding.) It has just gone ex-dividend.

Financials are as follows:

Price 41c
Eps HY to Dec 2003 (Actual) 3.3cps
EPS FY 2004 (Forecast) 5.0cps
p/e FY 2004 (Forecast) 8.2
Equity per share June 2003 29.4
Return On Equity 2004 17%
Note 17% ROE is calculated using 2004 forecast earnings and 2003 actual equity.

http://www.alliance.net.au/html/shar...ouncements.asp

One of the attractive features of the business is that, with ever rising insurance premiums, AFC automatically gets ever increasing revenue. A couple of worthwhile articles:

http://www.smh.com.au/articles/2003/...?from=storyrhs

http://www.theage.com.au/articles/20...849341059.html


Since listing on ASX, profits have been lower than forecast in prospectus. Nevertheless, profit growth is attractive, especially given the low price earnings ratio.

AFC is now expanding from Perth into new offices in Sydney and Brisbane.

Alliance believes the insurance premium funding market will continue to grow as a result of many factors, including:

• Customers’ increasing knowledge, and acceptance, of IPF as an attractive product (market maturity).
• The greater size, overall, of the insurance market, due to natural market growth and increases in premiums.
• The increasing penetration of IPF as a percentage of the entire insurance premium market, due in
part to the expectation that premium increases will ‘squeeze’ business cash flows.


There is plenty of competition out there, but it has not prevented AFC from carving out an attractive and growing share of the market. Here are comments from the web-sites of other companies in the IPF market:


Hunter “Hunter is the largest, most experienced premium funder in Australia and New Zealand with an annual turnover well exceeding one billion dollars.” (Compare with AFC rough forecast revenue for FY 2004 of $200 million)

http://www.hpf.com.au/internet/hpf.nsf/docs/About

Finlease "If you're like most of our clients, your general insurance premiums keeping going up and up. If you also have to carry public liability and/or workers compensation, these costs have shot through the roof. Some clients now face annual insurance charges in the neighbourhood of $100,000. And there's no end in sight.”

http://www.finlease.com.au/ipf.html


East West "You know forty percent (40%) of our clients utilize our Premium Funding Facility and we believe the percentage will grow to sixty percent (60%) over the next few years.

This form of finance to spread your insurance costs is fast becoming an attractive alternative to the up front costs. These payment plans allow you to spread your insurance costs over a number of months releasing important cash flow that you could use for building your business further. Talk to one of our team on how we can design a plan to suit your needs."

http://www.eastwestinsurance.com.au/ewib14.htm


Macquarie Premium Funding

How do you benefit?
#61623; Multiple business premiums can be covered by a single MPF loan
#61623; Fast, simple application process
#61623; Fixed, low interest rates
#61623; No ongoing loan service fees
#61623; Improved cash flow management
#61623; Tailored payment plan
#61623; Policy generally the only security required.

http://www.macquarie.com.au/au/busin...um_funding.htm

I believe AFC is good value and I have bought.

[i]Readers are reminded to do their own research before risking

[OldRider]

I agree with you Alban,it seems a good story,sat on my watchlist for all of last year gradually rising,but I never bought,was at 39c 12 months ago rising to a high of 45c a week or two ago,before dropping to 41c this week,I don't think it ever dropped below the 39c price.RV from
my system is 23.2 so is just a little under the 25 buy level,but still rather good with the level of dividend.

[KD]

Thanks for the post Alban - looks promising - I now have some homework for the weekend!

cheers

[pajama]

certainly worth a close look. like KD washing the car will have to be delayed.

[OldRider]

In this financing sector I did buy,and still hold CIY,which has gone well over the past year but has I expect had most of its run,and will probably consolidate round present price for some time. I have a liking for this type of company,they are able to grow without large demands for capital, and pay dividends while they are doing it.

Hopefully AFC might be the same as CIY. Another sector I like for the same reasons is that of recruitment,they can as well grow rapidly from the funds they generate themselves.

[Alban]

Thanks for your responses OldRider, KD and pajama. It's interesting to read your comparison with CIY, OldRider because I also have a financial-services comparison in mind when I look at AFC.

Although they're not in the same business, I tend to liken AFC to DPC in New Zealand, a finance stock that noodled along on p/e's of 6 and 7 before the market began taking notice of continual earnings growth. DPC now on a p/e of 10 and, because earnings have grown too, a very healthy return has been provided to moderately patient shareholders with the shareprice doubling in the last year.

AFC will not be another ATR, going through the roof in the space of a few months, but I believe those willing to hold for up to two or three years will be well rewarded with both healthy dividends and above average capital growth, in a manner similar to DPC.

Readers are reminded to do their own research before risking their shirts investing in common stocks.

[KD]

Still haven't done all my homework but have downloaded some reading. So will reserve comments for now except to note nice dividend at present and agree that, if they can deliver, this would be the time to be in. The graphs above must be from the prospectus (?) as AFC did not do so well in 2003 .... you mention that I think. I like this sector and RCD is one that has been/still is on my list. Had a look at CIY performance the other day and wondered whether anyone here had a dollar on this a few years back? Stunning performance.

cheers

[KD]

Pajama - someone with fewer posts here than me!

[pajama]

i like AFC. fits my criteria which includes div yield, low PE, directors having a big stake and ability to grow business without constant need for capital. the business model is sound and i like the way they manage their risk by simply cancelling insurance policies and getting premium refunded if they are not paid. exposure to any one client would be very low. leasing/laptop side of business seems a bit poor - they should focus on the insurance funding. none held as yet but order in. a potential growth stock without growth pricing - thanks alban for bringing this up.

[Risk]

the fundamentals look good for this one...thanks for your post Alban...we need more quality posts like the above.

my only concern looking at the chart is the apparent lack of liquidity....but might be one to add to the long term portfolio.