We initiate a BUY recommendation on Housing Finance Corporation of Kenya (HFCK) with a target price of Kes. 37.64 representing an upside potential of 27.58% from the current price of Kes. 29.50. We employed the PE and PB valuation methods to get the aggregate price of Kes. 37.64 and a dividend yield of 4.01%.
HFCK was incorporated in 1965 as the only fully fledged mortgage provider and is currently the second largest mortgage provider in Kenya.
Identified key drivers are:
§ Diversified Mortgage Products: HFCK has developed mortgage products which are in three main categories; mortgage financing, construction financing and retail banking solutions. The forex trading account was recently introduced.
§ Strong Market Share: The Company’s market share stands at 25%, second after KCB’s Savings & Loans (S&L) Mortgage.
§ Technology Upgrade: The mortgage financier is in the process of rolling out an electronic core banking platform by Q2 2014, which will be aimed at improving efficiency levels and customer relations.
§ Customercentric Products: HFCK’s ability to introduce innovative products, like the partly fixed mortgage products to counter varying inflation rates and the Ezesha Product which is tailormade for those unable to raise the upfront mortgage costs.
§ Flagship Project: The Komarok Phase 5A project commenced in 2012 and it entails constructing 162 homes on a 9 acre piece of land with a target retail price of Kes. 6.8Mn per unit. According to management, 90% of the project has been completed and sold, with the remainder expected to be completed by November 2013.
§ Leveraging on Partnerships: HFCK are in partnership with Equity Bank and BRITAM who hold 24.9% and 20% respectively of the company’s stock. BRITAM has insured the Ezesha product, while Equity Bank has the highest customer base comprising mainly of middle and low income earners with a deposit base of over Kes. 75Bn. HFCK on the other hand is focusing on developing mortgage products that will cater for these type of clientele.
Key risks and limitations:
§ Constraints in Mortgage Funding: Caused by liquidity constraints and maturity mismatch particularly between long term lending and short term deposits responsible for the uptick in NPLs from Q3 2012’s figure of Kes. 1.42Bn to Kes. 2.43Bn in Q3 2013.
§ High Cost of Funds: The Company’s cost of funds stood at 7.46% in 2012, the highest among its peers. This figure is above the industry’s average of 6.01%.
§ Competititive Mortgage Rates: Other mortgage providers are offering relatively lower mortgage rates – Stanchart at 12.9% for 45 days, CfC Stanbic at 13.5%, Barclays Bank of Kenya 15.5% and KCB S&L at 16%, as compared to HFCK. It should however be noted that HFCK recently reduced its lending rate by 200bps to 16%.
§ The Looming Capital Gains Tax: If effected, property owners will feel the negative impact on rental income.
§ Complexity in Land Registration: The existing land registration regulations are complex and discouraging to potential land owners.
With Regards,
Research Department
Sterling Capital Limited
Barclays Plaza, 11th Floor, Loita Street
P.O. Box 45080-00100, Nairobi
Tel.:+254 (020) 2213914, 2244077
Office Fax: +254 (020) 2218261
Website:
www.sterlingstocks.com