We reiterate our Buy recommendation on Unifin Financiera S.A.B. de C.V. (UNIFIN) despite a slowdown in leasing origination – partly offset by strong financial factoring and auto lending activities. Although the Q2 results reflect the first signs of a deceleration in the Mexican economy, UNIFIN remains resilient, in our view. We believe there is further upside potential for the family of bonds, particularly on a relative-value basis against its closest comparables.
Overall, we regard UNIFIN’s Q2 results as solid, given the economic deceleration.
The company reported an increase in interest income to cMXN2.611bn (US$136.65mn) from MXN2.11bn (US$110.43mn) in Q2 19. The distribution of income was shared between leasing activities (75.4%, from 75.6% in Q2 18), auto and other loans (20.2%, from 19.4% a year ago) and factoring (4.4%, from 5.0% a year ago). The overall portfolio composition at end-Q2 19 was leasing at 76.5%, auto loans and others at 17.8%, and factoring at 5.7%.
The cost of funding rose slightly to 10.10% in H1 19, compared with 9.97% during the same period a year ago. However, the financial margin increased in the quarter to cMXN872mn (US$45.64mn, from MXN701mn (US$36.69mn) on a yoy basis. Net income in Q2 was MXN453mn (US$23.71mn, compared with MXN397mn (US$20.78mn) a year ago.
Non-performing loans (NPLs) as a percentage of the total loan portfolio increased slightly during the period, to 3.8%, from 3.6% at end-18 and 4.1% at end-17. In H1 19, NPLs increased by c25% relative to H1 18 – a sign that the Mexican economy is deteriorating. However, as UNIFIN is mainly a leasing company that owns the assets it leases, it has historically repossessed assets at c80% of their recovery value.
In terms of valuation, we regard Unifin Financiera and Crédito Real (see our CREAL report here) as Mexico’s strongest and best-managed non-bank financial institutions (NBFIs), despite the differences in their respective activities. As such, for bondholders, we tend to compare these two financial institutions to find value. At current trading levels, we believe UNIFIN provides investors with attractive yields and, if the Mexican economy resumes more pronounced growth later this year, further possible upside.