Felicia Tan Fri, Jun 10, 2022
UOB Kay Hian analyst Llelleythan Tan has called Yangzijiang Financial Holding (YZJFH) an “undervalued gem” in an unrated report dated June 9.
On June 8, the company had just obtained its shareholders’ approval to conduct its $200 million share buyback programme.
The buyback was conducted on June 9, where the company bought one million shares at 51 cents each. YZJFH’s CEO Vincent Toe and its independent directors had previously acquired some 1.7 million shares at an average of 57 cents per share in May.
“As YZJFH is trading at a huge discount to book value, the start of an aggressive share buyback after June 8 could be a key catalyst for YZJFH,” Tan writes.
The buyback programme, as well as insider purchases represent a strong sign of confidence from management, he adds.
Since 2011 to 2021, YZJFH, which is the carved-out and spun-off debt investment business of Yangzijiang Shipbuilding, has generated an impressive return track record of 9% to 15% pre-tax return on assets (ROA).
The company has also indicated its plans to recycle its investment principal from matured loans into its investment management business.
Around 95% of YZJFH’s $3.9 billion in debt investments is expected to mature by end-2022, notes Tan.
At its current share price, YZJFH is trading at an attractive valuation of an FY2021 P/B of 0.5x, considering its lack of debt and $4.2 billion of cash and short-term investments.
“Strong operating cash flows from its debt investments business would support YZJFH’s proposed dividend policy of at least 40% of net profit after tax, implying an FY2022 dividend yield of above 6% (assuming 40% dividend payout from the lowest net profit achieved in the last three years of $321 million),” says Tan.
“Based on the historical P/B band of 0.5-1.2x of YZJFH pre-split, this implies a valuation of 50 cents to $1.29,” he adds. “On the other hand, YZJFH’s 0.5x 2021 P/B is at a deep discount compared with the peers’ valuation of 0.5-2.1x 2021 P/B (excluding outliers).”
As of 2021, the borrowers of YZJFH’s debt investments are from diverse industries including manufacturing (37%), real estate (24%), services (15%) and wholesale/retail (10%).
To safeguard its interests in the event of default, the company has obtained collaterals from the end-borrowers through third-party financial institutions for the majority of the loans.
“Such collaterals are project specific and cannot be used for any other purpose. As such, YZJFH is the ultimate beneficiary of the collaterals. Debt investments with collaterals have loan-to-value of an average of 46.09% from their borrowers (implying collateral coverage ratio of 1.96x),” says Tan.