Ann: AFG to acquire Asset Finance Aggregator Fintelligence, page-11

Morgans:

Details of the acquisition
▪AFG will pay $52.5m for the purchase of 75% of Fintelligence, funded primarily by
a new corporate debt facility secured from a major bank.The transaction values
Fintelligence at $70m on a cash-free, debt-free basis, equating to a FY22F P/E of
~10.6x.
▪AFG has an exclusive option to acquire the remaining 25% interest in Fintelligence
over the next 3.5 years with value linked to Fintelligence achieving agreed
milestones.
▪AFG has said that Fintelligence’sstandalone asset finance settlements exceed
$1.15bn pa, driving forecast net revenue of $27m in FY22 and standalone forecast
FY22 NPAT of $6.6m. These forecasts are on a 100% basis.
▪The transaction is expected to be EPS accretive (pre synergies) in the first full year
post integration and the proposed funding structure is expected to allow AFG to
maintain its dividend policy.
▪The acquisition is subject to confirmatory conditions precedent, which AFG expects
will be metin the ordinary course and is expected to complete by 31 December
2021.
Market position of Fintelligence
▪AFG has indicated that the combined asset finance settlements of Fintelligence
and AFG would equate to market share of 4-4.5%, and the combined group would
be top five in terms of asset finance aggregatorsin the country.
▪System annual asset finance settlements are a little over $40bn, and the largest
asset finance aggregator in the market seems to be doing settlements of ~$5.2bn.
We find prospect of revenue synergies to be attractive
▪As a result of this acquisition, we expect AFG to commence its own asset finance
white label and securitisation programs in due course. That is, we see potential for
meaningful revenue synergies to be generated.
▪If an asset finance securitisation program eventuates, then we expect the
securitised asset finance product to be AFG’s highest margin product.Having said
this, we do view AFG’s potential foray into asset finance manufacturing as a shift
up therisk curve given that we believe asset finance manufacturing comes with
greater credit risk and funding risk than the manufacturing of home loans. However,
the funding risk is arguably not somuch of a concern as long as the Australian
Office of FinancialManagement (AOFM) –an arm of Federal Treasury –stands
ready to provide funding support to non-bank lenders during times of funding crisis.
▪We suspect that an asset finance securitisation program will not be up and running
for at least the next 12 months and we are consequently not building any related
revenue synergies into our forecasts as yet.However, we expect such a program
to ultimatelyresult infurtherEPS accretion in excess of 5%.
Investment viewand changes to forecasts
▪We have increased our EPS forecasts by 3.1%/5.5%/5.6%for FY22/FY23/FY24
respectivelyas a result of accretion stemming from the announced acquisition.
▪Our target price, based on our DDM valuation, is $3.60 (previously $3.40)