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Deutsche Bank

Maintain Buy: PT increased from $3.70 to $4.40

The 1H13 result, on balance, was another strong showing from FXL. The
emerging areas of the business are performing well and establishing a platform
for continued earnings growth over the mid term. The company will also
benefit from operating and funding cost benefits to come through in FY14. Our
price target increases in line with our P/B valuation from $3.70 to $4.40.

Miss on NPAT but concerns around Certegy are overdone
1H13 NPAT was 5% below our forecast, with the miss mainly due to Flexirent,
where additional costs and weaker volumes saw NPAT fall 7% short of our
forecast. Certegy NPAT was also slightly weaker than we expected, impacted
by additional marketing costs, with profitability (NPAT/ANR) also falling short.
We think concerns around this issue appear overdone however, with the
timing of volume growth (skew towards latter part of period) distorting returns.
The impressive Certegy volume growth (22% vs DBe 7%) is a better indicator
of performance in our view and underpins our upgrades to FY14 earnings.

Strong result in key areas
FXL’s growth divisions, Certegy, Commercial and Lombard are all performing
well in our view. Lombard is tracking to expectations, while Commercial
delivered better than expected profitability, which points to a high quality
result. Impairment rates continue to trend lower in all divisions.

Earnings revisions
Our FY13 earnings decrease by 1% while our FY14 NPAT increases by 4%,
driven by Certegy and Commercial upgrades. FXL re-iterated guidance for
FY13 NPAT growth of 11-16% (DBe 16.4%).

Valuation and risks
Our PT increases from $3.70 to $4.40, set equal to our justified P/B valuation.
Key assumptions are: (Ke 12.0%; g 6%, ROE 28%). Key downside risks are:
Non-performing loans; increasing Australian unemployment; and lower than
expected receivables growth.