maquaries comments

Allco Finance Group
Investor concerns

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Stock: AFG AU
Volatility Index: medium


We examine the key Allco investor concerns and preview the first half of 2008 result due on 15 February. Allco has also announced the creation of two wholesale funds taking total assets under management to $13bn (excluding Rubicon $5bn).

Impact

Perception #1: Allco's funds management division is ex-growth. Despite the poor performance of the Allco listed funds, the creation of wholesale funds is driving continued growth. Allco previously set a target of four new wholesale funds by June 2008 (Transportation, Shipping, Infrastructure and Singapore based investment funds) and has now delivered on two of these, raising $600m of external equity, with two more shortly.

Perception #2: Allco is running out of money. Allco raised $500m of equity in December 2006 and a further $350m of subordinated debt in May 2007. When the credit crunch hit in July, Allco was positioned with $900m of undrawn funding facilities and Allco now has $312m left prior to any asset sales, lease maturities and loan repayments.

Perception #3: Allco is highly geared and financially risky. Total recourse debt as a percentage of debt plus equity is only 35%. Allco has a wholesale financial service division (ie Gateway & Mobius) that operates like a bank by borrowing and re-lending. This division was less than 3% of Allco 2007 net profit after tax, but increased assets and liabilities by over $3.6bn distorting the Allco balance sheet. Secondly, Allco financed 3 Airbus A330s for Emirates on long term leases using 95% non-recourse debt, 5% equity in December.

Perception #4: Earnings quality is poor. If the Allco business model is working effectively, there should be a high and growing proportion of asset sales to Allco related vehicles. Average compound earnings per share growth since May 2002 of Record Investments/Allco has been 53.7%, a commendable effort.

Perception #5: Rubicon transaction is overpriced. We can't rebut this one given the embryonic and unpredictable nature of Rubicon's earnings. The related party transaction however is small in the group context of Allco (circa 10%) and it will take two years to assess the quality of this acquisition.

New price target of $9.30 (previous $14.15). Our previous price target of 14 times 2009 earnings per share now looks optimistic given the current environment. We have cut this to 10 times to reflect the dilutive Rubicon acquisition.

Earnings revision

Earnings per share: 2008 -7.2%; 2009 -8.3% due to dilutive Rubicon acquisition.

Price catalyst

12-month price target: $9.30.

Catalyst: Delivery of transparent results, further funds management growth.

Action and recommendation

Outperform (12-month view). Fear of the unknown has destroyed Allco's market rating and two more satisfactory results (February and August) are needed to reverse this. With a 2008 price to earnings ratio of just 7 times and a dividend yield of 8%, we maintain the Outperform despite the unfavourable market backdrop.