Financial Services

AFG completes merger with Fintelligence

Fri 24 Dec 21, 2:10pm (AEST)
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Key Points

  • Merged entity to have $1.7bn in combined asset finance settlements
  • Fintelligence’s commercial focus could offset any potential housing downside
  • Merger expected to be 6.5% earnings accretive in FY22

Australian Finance Group's (ASX: AFG) has confirmed that the company’s corporate debt-funded acquisition of a 75% stake in cloud-based asset finance aggregator, Fintelligence for $52.5m is now complete.

The mortgage broker has an exclusive option to acquire the remaining 25% interest in Fintelligence over the next three and a half years with value linked to Fintelligence achieving agreed milestones.

This expected to provide sufficient inducement for Fintelligent management to not only stick around, but also help to continue growing the business.

Securitisation

Fintelligence will add 285 brokers to AFG’s existing 3,050 broker network and is expected to finance $1.1bn worth of loans in 2022.

Based on combined proforma results, the combined entity delivers combined asset finance settlements of more than $1.7bn annually.

After calling off a merger with Connective, AFG’s management has told investors that it sees securitisation as the company’s single biggest growth opportunity, with Fintelligence providing additional horsepower.

Diversification

With Australia’s property boom presenting AFG with a particularly strong year for originations, the loan book was up 17% to $3.4bn.

While any cooling of the real estate market may have a material impact on AFG's settlement volumes and profits, Fintelligence’s more commercial focus may help to offset any potential downside.

Last June saw AFG make efforts to attract the millennials market when it took 8% equity stake in neobank, Volt Bank. This strategic move was planned to push a “white label” mortgage offering.

Around 10% of the mortgages placed by AFG’s broker are currently funded by its existing white-label suppliers: Advantedge, part of National Australia Bank (ASX: NAB) and Bendigo and Adelaide Bank (ASX: BEN).

Fundamentals

Due to this year’s property boom, AFG reported a 37% jump in full year net profit to $50m, with residential settlements up 28% to $44bn. Equally pleasing, the company’s own-brand home loan settlements were also up 10% to $3.5bn.

Despite the regulator’s (APRA) concerns over rising indebtedness relative to flat income growth, the average loan size provided by the AFG network shot above $600,000 for the first time in the past quarter, 17% higher than the level last year.

What brokers think

Macquarie expects AFG’s merger with Fintelligence to add scale to the company's aggregator position in asset finance, and estimates earnings accretion of 6.5% in FY22.

Both Morgans and Citi, together with Macquarie have Buy (or equivalent) recommendations on the stock which is trading at a sizable 33% discount to FN Arena’s quoted 12-month target price of $3.46.

Consensus on AFG is Strong Buy.

Based on Morningstar’s fair value of $2.77, the stock looks to be undervalued.

Written By

Mark Story

Editor

Mark is an award-winning investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics, a diploma in journalism and has completed the Institute of Directors course. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content.

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