A strong start given solid revenues, higher efficiency, and provisions reversals
ATLC 1Q22 net income recorded EGP26 million (+57% q/q, -64% y/y). The sequential improvement took place due to: 1) a growth in the top-line by 19% q/q, 2) growth in gross profit by 21% q/q, 3) decline in OPEX by 7% driven by lower admin expenses (-9% q/q), 4) FX gains of EGP1 million. On the other hand, the annual decline came in despite lower OPEX, provisions reversals of EGP1 million, compared to provisions of EGP0.3 million in 1Q21, and FX gains of EGP1 million, compared to FX losses of EGP0.05 million. The decline is attributable to the one-off securitization gain of EGP65 million that was booked in 1Q21, which if removed, bottom-line would have witnessed an 11% y/y growth.
1Q22 key takeaways were:
New lease contracts in 1Q22 amounted to EGP385 million, bringing the outstanding lease portfolio to EGP4.3 billion as of March 2022 (+10% q/q, +39% y/y). This implies healthy growth of the leasing portfolio.
NIM stood at 6.6% in 1Q22 (+0.7 pps q/q, -1.4 pps y/y). The sequential growth came in as a result of the higher revenue generated from leasing and factoring activities which expanded by 15% sequentially supporting the net interest income. However, the annual decline came in despite an annual 28% growth in the revenue generated from leasing and factoring activities, mainly on the back of the higher cost of financing on an annual basis which resulted in a decline in net-interest income.
The growth in revenue from leasing and factoring activities is mainly supported by the growth of the leasing activities, despite the fact that the factoring activities grew at a faster pace, as interest income from leasing activities expanded by 9% q/q, and 18% y/y, while factoring income expanded by 177% q/q and recorded EGP12 million, compared to none in 1Q21. This is because the effect of the factoring activity growth is not evident as its contribution to the total portfolio is still minimal (10% of the total portfolio as of March 2022)
Fees income stood at EGP3.9 million, implying a 27% and 122% sequential and annual increase, respectively. However, the annual growth did not reflect significantly on the gross profit, since the effect of the top-line decline was much stronger.
OPEX declined by 7% sequentially and by 3% annually given lower selling and admin expenses which recorded EGP18 million in 1Q22 (-9% q/q, -4% y/y).
Looking at the total expenses, it witnessed a 1% q/q and 5% y/y decline. The expenses came lower as it was supported by provisions reversals of EGP0.77 million in 1Q22, compared to provisions of EGP0.34 million in 1Q21, and reversals of EGP1.4 million in 4Q21. Despite the reversals, the bottom-line still witnessed a decline of 64% in 1Q22 on an annual basis, since 1Q21 bottom-line included securitization gains of EGP65 million. Accordingly, to isolate the effect of the one-off gain, we used an average tax rate of 24% calculated over 2019-2020 to calculate an estimate of the bottom-line in 2021 excluding the securitization gain. Our estimate for the bottom line excluding the one-off gain amounted to EGP24 million, which is 11% lower than the bottom line in 1Q21. This implies healthy growth of the company supported by the growth of leasing activities, higher efficiency, and provisions reversals as well.
The cost-to-income ratio declined sequentially by 11 pps and declined annually by 2 pps to stand at 38%. The decline came on the back of the lower selling and admin expenses, along with a 40% sequential and 6% annual increase in operating profits.
The leverage ratio stood at 10.4x, which is higher than the maximum leverage ratio for leasing companies of 9.0x. This implies the need for a securitization issuance to maintain the leverage ratio under the maximum level.
Expected to outperform in the future; maintain Overweight
The bottom-line in 1Q22 came in strong despite the global and local economic slowdown, mainly supported by the company’s stable margins, higher efficiency and solid leasing and factoring portfolio growth. Given the company’s strong leasing momentum over the past years, we expect its portfolio to witness significant growth over the coming 5 years, triggering the need for more securitization issuances over the coming years to bring its leverage ratio below the minimum requirement of 9.0x, thus, allowing the company to book more securitization gains along with the income generated from its normal leasing and factoring activities. Accordingly, we reiterate our overweight recommendation on ATLC on FV of EGP7.50, given the expected growth in portfolio and bottom-line.
ATLC is currently trading at P/B22 of 0.9x and P/E22 of 3.9x, on an ROE of 28%.