SRI LANKA EQUITY | NON-BANK FINANCE INSTITUTIONS

EARNINGS UPDATE | 16 FEBRUARY 2021

People’s Leasing [PLC]: HOLD [+11%] Lakshini Fernando

lakshini@asiasecurities.lk
+94 11 772 2045
Shrinking net advances, high impairments impact PAT
We rollover our valuations to FY22E and rate the stock a HOLD with a TP of Key statistics
LKR 14.00/share (+9.4% upside, +11.3% TSR). PLC recorded a bottom line BBG ticker PLC SL
of LKR 535mn for 3Q FY21, down 58.3% YoY (-51.3% QoQ), coming in below CSE ticker PLC.N0000
our forecast owing to higher than anticipated impairments during the
GICS subsector Consumer Finance
quarter. Net advance growth declined by 7.2% YoY due to the cautious
Price at 15 Feb 21 (LKR) 12.80
approach to lending combined with vehicle import restrictions. PLC is
currently trading at 0.6x FY22E BV. With the re-rating of the overall 52 week Hi/Lo (LKR) 15.10/9.25
market, we value the stock at 0.63x FY22E BV due to 1) exposure to Market cap (LKR mn) 21,819
commercial leasing and 2) strong core capital position. Market cap (USD mn) 115
No. of shares (mn) 1,705
Net advances continue to shrink on cautious lending stance ADT (LKR mn) - 3M 11.9
The Group’s net advances continued to decline, down 7.2% YoY (-3.5% QoQ) to ADT (USD k) - 3M 62.5
LKR 142bn. This was due to cautious lending by the company, particularly in ADT (shares k) – 3M 898.1
the commercial leasing sphere. Furthermore, it is our view that vehicle import
Free float (%) 13.0
controls also went on to negatively impacted leasing demand, despite higher
Public holding (%) 24.9
secondhand leasing demand. Looking ahead, with higher economic activity, we
expect net advances to recover in 4Q FY21E. However, given the higher than Company website | CSE website
forecasted decline in the net advance book during the quarter, we revise our Source: CSE, Bloomberg, Company data
forecast downwards to LKR 151bn for FY21E(LKR 154bn previously). Note: LKR converted at 190 LKR per USD

Impairments come in higher than forecast; looks to decline in 4Q FY21E Valuation summary
Impairments during quarter were LKR 1.8bn (compared with LKR 350mn in 2Q Price at 15 Feb 21 (LKR) 12.80
FY21). This came in higher than our forecast of LKR 1.2bn for the quarter. Target price (LKR) 14.00
Looking ahead, while impairments will increase once moratoriums are Upside (%) 9.4
completed, we expect impairments to taper down as economic activity FY22E DPS (LKR) 0.25
increases. We forecast impairments at LKR 4.5bn in FY21E, but improve in Total return (%) +11.3
FY22E barring any further lockdowns. We expect NPLs to reach 6.00% in FY21E
Source: Asia Securities
(4.30% in FY20).
Share price movement (indexed to PLC)
NIMs to face pressure despite deposits re-rating downwards
TTM NIMs contracted during the quarter owing to the moratoriums and the low LKR
24
rate environment. As such, NIMs came in 216bps lower (-58bps QoQ), with NII
down 23.9% YoY (+14.0% QoQ). Looking ahead, we expect lower deposit rates 20
to continue to ease some of the NIM pressure amidst low interest rates. We do
not expect the lower expense rate to completely negate the impact of low 16
lending rates given that deposits re-rate at a slower pace than loans. We
forecast NIMs to come in at 7.95% in FY21E (compared with 9.56% in FY20). 12

We adjust our forecasts and revise our TP to LKR 14.00/share 8

Feb-20 Jun-20 Oct-20 Feb-21
PLC currently trades at FY21E P/B of 0.6x, below its peer average of 0.7x. We
rollover our valuations and adjust our forecasts slightly to the higher than PLC ASPI S&P SL20
expected decline in PLC’s net advance book. Factoring in the overall upward
re-rating of the market, we value the stock at 0.6x FY22E BV. In our view, the Movement (%) YTD 3M 12M
discount to PLC’s historic average is justified given 1) slow net advance growth PLC 3 8 (15)
momentum, 2) NIM squeeze and 3) slow economic growth. This leads to our TP ASPI 17 30 36
of LKR 14.00/share (9.4% upside; +11.3% TSR). We continue to view the stock a S&P SL20 20 32 14
long-term positive given its commercial leasing exposure. HOLD. Source: CSE, Bloomberg

Financial summary
In LKR mn 3Q FY20 3Q FY21 YoY % FY20 FY21E YoY %
Net interest income 4,561 3,469 -23.9 17,172 14,125 -17.7
Pre-impairment income 6,298 5,185 -17.7 23,944 21,202 -11.5
Recurring net profit 1,284 535 -58.3 3,408 2,606 -23.5
Net advances 153,271 142,257 -7.2 154,135 151,287 -1.8
Recurring diluted EPS (LKR) 0.76 0.28 -63.2 2.09 1.60 -23.5
ROE (%) 14.3 6.7 -7.7pp 19.8 7.9 -11.9pp
P/E (x) 4.7 9.4 6.1 8.0
P/B (x) 0.7 0.6 0.6 0.6
Source: Company data, Asia Securities | Note: Historical interim ROE, P/E on a TTM basis
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 Estimate revisions
In LKR mn FY21E - O FY21E – N %Δ FY22E - O FY22E – N %Δ FY23E - O FY23E – N %Δ
Net interest income 14,691 14,125 -3.9 15,952 15,888 -0.4 16,399 16,182 -1.3
Pre-impairment income 21,768 21,202 -2.6 23,320 23,256 -0.3 24,109 23,892 -0.9
Recurring net profit 2,742 2,606 -5.0 3,136 3,116 -0.6 4,087 4,014 -1.8
Net advances 154,313 151,287 -2.0 156,176 152,954 -2.1 163,070 159,542 -2.2
EPS (LKR) 1.68 1.60 -4.7 1.93 1.91 -0.8 2.51 2.47 -1.8
Tan. BVPS (LKR) 20.41 19.79 -3.0 22.29 22.26 -0.1 24.8 24.72 -0.3
ROE (%) 8.2 7.9 -0.3pp 8.9 9.0 +0.1pp 10.5 10.4 -0.1pp
P/E (x) 7.2 8.0 6.3 6.7 4.9 5.2
P/B (x) 0.6 0.6 0.5 0.6 0.5 0.5
Source: Company data, Asia Securities | Note: O – Old estimate, N – New estimate

Key ratios
FY2018 FY2019 FY2020 FY2021E FY2022E FY2023E
Recurring net profit growth (%) 13.2 (0.1) (29.2) (23.5) 19.6 28.8
Diluted recurring EPS growth (%) 13.2 (0.1) (29.2) (23.5) 19.6 28.8
Net advance growth (%) 5.3 10.0 -1.8 -1.8 1.1 4.3
Gross NPL (%) 2.70 3.91 4.30 6.00 4.50 4.00
Net NPL (%) - - - - - -
NIM (%) 8.28 9.61 9.56 7.95 9.00 8.79
NIS (%) 5.8 7.2 7.2 5.2 5.2 4.2
Cost/income (%) 47.7 48.3 49.7 49.4 47.2 48.8
Loans/deposits (%) 465.7 182.3 151.6 175.0 180.0 180.0

Tier 1 ratio (%) 22.70 22.13 23.26 23.25 22.16 23.40

Total capital ratio (%) 22.70 23.97 25.82 30.02 31.80 32.00

ROA (%) 2.9 2.7 1.8 1.4 1.7 2.2

ROE (%) 17.7 16.2 19.8 7.9 9.0 10.4
P/E (x) 4.3 4.3 6.1 8.0 6.7 5.2
P/B (x) 0.7 0.7 0.6 0.6 0.6 0.5
Dividend yield (%) 3.9 5.9 2.0 2.0 3.9 3.9
Dividend payout (%) 16.9 25.4 11.9 15.6 26.1 20.3

Recurring diluted EPS (LKR) 2.96 2.96 2.09 1.60 1.91 2.47
DPS (LKR) 0.50 0.75 0.25 0.25 0.50 0.50
Tan. BVPS (LKR) 17.61 18.84 19.96 19.79 22.26 24.72

No. of employees 2,085 2,329 2,329 2,329 2,369 2,472

No. of branches 103 103 103 103 103 103
Source: Company data, Asia Securities

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 Income statement
In LKR mn FY2018 FY2019 FY2020 FY2021E FY2022E FY2023E
Net interest income 12,955 16,343 17,172 14,125 15,888 16,182
Net fee and commission income 686 1004 1256 1281 1294 1333
Net FX income - - - - - -
Net trading income 60 (44) 20 25 15 15
Net investment income - - - - - -
Total non-interest income 746 960 1276 1306 1309 1348
Other operating income 4,783 5,162 5,496 5,771 6,059 6,362
Total income 16,852 20,585 18,935 16,693 18,456 20,392
Personnel expenses (2,992) (4,167) (4,561) (4,731) (4,949) (5,289)
Depreciation and amortization (294) (302) (634) (414) (203) (388)
Other expenses (5,526) (6,377) (6,007) (5,319) (5,834) (5,994)
Total operating expenses (8,812) (10,846) (11,202) (10,464) (10,987) (11,671)
Pre-impairment income 18,484 22,465 23,944 21,202 23,256 23,892
Net impairment charge (1,632) (1,880) (5,009) (4,508) (4,800) (3,500)
Operating profit before VAT and NBT 8,040 9,739 7,733 6,229 7,470 8,721
VAT and NBT (1,324) (2,118) (2,031) (1,869) (2,256) (2,006)
Associate income (pre-tax) (53) (33) - - - -
Profit before tax 6,663 7,588 5,702 4,361 5,214 6,716
Income tax expense (1,645) (2,576) (2,111) (1,614) (1,930) (2,486)
Associate income (post-tax) - - - - - -
Minority interest (201) (198) (183) (140) (167) (216)
Recurring net income 4,817 4,814 3,408 2,606 3,116 4,014
Source: Company data, Asia Securities

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 Balance sheet
In LKR mn FY2018 FY2019 FY2020 FY2021E FY2022E FY2023E
Assets
Cash and cash equivalents 4,767 4,311 7,693 850 884 920
Securities purchased under resale agreement - - - - - -
Balances with banks & financial institutions 8,759 7,375 6,661 11,245 6,931 7,070
Leasehold property 87 84 1,639 1,639 1,639 1,639
Financial assets -Fair value through profit or
315 72 1,199 1,199 1,199 1,199
loss
Loans and receivables 142,713 156,956 154,135 151,287 152,954 159,542
Insurance and reinsurance receivables 407 885 1,195 1,195 1,195 1,195
Financial assets - Fair value other
219 126 1,456 1,456 1,456 1,456
comprehensive income
Debt instrument at amortised cost 6,014 9,092 4,813 4,813 4,813 4,813
Investments in associates 423 238 - - - -
Property, plant and equipment 4,113 4,017 3,998 3,857 3,857 3,857
Goodwill and intangible assets 453 432 369 488 609 301
Investment property 1,266 1,132 1,132 1,132 1,132 1,132
Deferred tax assets 28 48 472 412 412 412
Other assets 1,389 1,165 1,235 1,467 1,467 1,467
Total assets 170,953 185,933 185,997 181,039 178,548 185,003

Liabilities
Due to banks 69,378 30,475 10,978 8,495 8,840 9,199
Due to customers 31,336 88,923 107,686 92,384 93,410 99,015
Debt securities issued 26,282 21,134 18,338 11,979 8,151 555
Other financial liabilities - 2,465 2,830 3,309 4,306 6,034
Derivative financial instruments - - - - - -
Insurance liabilities and reinsurance payable 63 4,881 5,065 5,572 5,794 6,084
Current tax liabilities - 2,324 2,077 1,454 831 1,454
Deferred tax liabilities - 1,142 418 376 828 745
Other liabilities 13,041 1,607 1,702 20,150 15,497 16,402
Total liabilities 140,100 152,951 150,688 145,254 139,888 142,470

Equity
Stated capital 13,236 13,236 13,915 13,915 13,915 13,915
Statutory reserves 1,837 2,071 2,235 2,365 2,521 2,722
Retained earnings 13,167 15,198 16,518 16,061 19,919 23,732
Other reserves 448 207 285 285 285 285
Non-controlling interest 2,165 2,270 2,357 2,264 2,020 1,878
Total equity 30,853 32,982 35,310 34,890 38,660 42,532

Total equity and liabilities 170,953 185,933 185,998 180,144 178,548 185,003

Contingent liabilities 783 514 706 687 678 702

Source: Company data, Asia Securities

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 Top 10 shareholders – (% held)
Shareholder Dec-19 Sep-20 Dec-20 Δ YoY (pp) Δ QoQ (pp)

People's Bank 75.00 75.00 75.00 - -

Employees Provident Fund 5.43 5.43 5.43 - -

BNYM SA NV RE-Neon Liberty Lorikeet Master Fund LP 4.63 3.94 3.94 -0.69 -

National Savings Bank 2.76 2.76 2.76 - -

Rubber Investment Trust Limited A/C # 01 1.04 1.04 1.04 - -

Bank of Ceylon No. 1 Account 0.72 0.72 0.72 - -

Employees Trust Fund Board 0.15 0.50 0.54 +0.39 +0.04

Sri Lanka Insurance Corporation Ltd-General Fund 0.44 0.44 0.44 - -

Perera And Sons Bakers Pvt Limited - 0.31 0.44 +0.44 +0.13

Ceylon Investment PLC A/C # 01 0.31 0.31 0.31 - -

Source: Company data

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 Analyst Certification
I, Lakshini Fernando, certify that the views expressed in this report accurately reflect my
personal views about the company. I also certify that no part of my compensation was, is, or
will be, indirectly or directly, related to the specific view or recommendation expressed in this
report.

Company Certification
Asia Securities (Private) Limited has no direct affiliation with the company/companies covered
in this report and does not receive any material benefit from the company for publishing this
report.

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Research
Kavinda Perera – Head of Research Naveed Majeed Lakshini Fernando
Strategy | Banks | Insurance | Manufacturing | Textiles | Economics | Finance
Telecommunications Energy | Construction lakshini@asiasecurities.lk
kavinda@asiasecurities.lk naveed@asiasecurities.lk +94 11 772 2045
+94 11 772 2044 +94 11 772 2043
Harini Wijayaratnam
Semini Mendis Shevon Mendis Leisure | Healthcare
semini@asiasecurities.lk shevon@asiasecurities.lk harini@asiasecurities.lk
+94 11 772 2041 +94 11 772 2047 +94 11 772 2042

Institutional Sales
Sabri Marikar Shiyam Subaulla Niroshan Wijekoon
Deputy Chairman COO, Equities niroshan@asiasecurities.lk
sabri@asiasecurities.lk shiyam@asiasecurities.lk +94 11 772 2007
+94 11 772 2022 +94 11 772 2011 +94 77 771 3645
+94 77 357 6868 +94 77 350 2016

Dayan Fernando Charith Perera Gagani Jayawardhana

Dayan@asiasecurities.lk charith@asiasecurities.lk gagani@asiasecurities.lk
+94 77 735 4081 +94 11 772 2015 +94 11 772 2014
+94 77 359 8937 +94 71 408 4953

Foreign Sales
Lahiru Ariyaratne Udith Wickramasinghe Jeevan Hettigoda
CEO udith@asiasecurities.lk jeevan@asiasecurities.lk
lahiru@asiasecurities.lk +94 11 772 2031 +94 11 772 2080
+94 11 772 2002 +94 71 868 8004 +94 77 378 2661
+94 77 3468103

Retail Sales
Subeeth Perera Priyantha Hingurage Romesh Priyadarshana
subeeth@asiasecurities.lk priyantha@asiasecurities.lk romesh@asiasecurities.lk
+94 11 772 2035 +94 11 772 2033 +94 11 772 2032
+94 71 404 2683 +94 77 350 2015 +94 77 254 8795

Kalana Hewawasam Ashan Silva Yasith Gallage

kalanag@asiasecurities.lk ashan@asiasecurities.lk Yasith@asiasecurities.lk
+94 11 772 2028 +94 11 772 2005 +94 11 772 2010
+94 77 395 9438 +94 77 045 8028 +94 77 629 4214

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