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Adira Dinamika Multifinance is a leading multifinance company with a 7% market share in multi-finance loans. ADMF has one of the best presence in Indonesia with 518 outlets throughout Indonesia. Their focus is on auto loans, representing 99% of its loan portfolio. ADMF is 92.1% owned by Bank Danamon, which provides them with synergies such as the ability to do joint-financing and receive access to lower cost of funds.

Value Proposition – will it be disrupted?

Multifinance companies like ADMF exist to serve the unbanked population, which is a large proportion of the population in Indonesia at 64% of the adult population. In return for the perceived higher risk of serving this segment, multifinance companies can command very high asset yields. This has resulted in very high profitability for multifinance companies. For example, ADMF has an asset yield north of 22%, and an ROAE of 22.7%.

Recently, a new competition in Fintech companies has come to serve the unbanked population. Innovations such as peer-to-peer lending has come to eat up the pie of finance companies with high yield spreads such as multifinance companies. In the meantime, I believe multifinance companies will still be very profitable as manpower is needed to serve these unbanked population. However, in the longer term, with the increase in smartphone penetration, improvements in 4G network across the country (supported by the government), and as Indonesia’s population becomes more digital-savvy, we can see Fintech products being commercialized, which will eat up multifinance companies’ fat profits.

I believe banks (especially the big banks) will still be able to sustain current profitability with their competitive advantage of being able to take customer deposits at a low cost of fund. On the other hand, multifinance companies with the high cost of funds might lose their value proposition.

Focusing on Efficiency

Starting from 2013, ADMF has been focusing on efficiency, reducing their number of outlets and employees. Outlets are down by 22% up to 2016 compared to 2013, while employees are down 30%. In return, ADMF is digitising its business processes.

2017 Expected Results

2017F earnings: 1,200bn, ROAE: 22.7%

At Rp8325/sh: P/E: 6.9x, P/BV: 1.51x

ADMF’s 2017 earnings is expected to increase 18.9% YoY, which is mainly caused by falling interest expenses in the midst of the declining interest rate environment in 2017. Motorcycle financing, which is the largest part of ADMF’s loan portfolio, is not that sensitive to interest rates because low-income consumers focus more on their ability to pay the instalments, rather than focus on interest rates. Meanwhile, ADMF’s cost of funds falls significantly, as ADMF is able to issue new bonds at lower coupon rates. As a result, we can say that current earnings are at a mid-high point cycle.

With a historical dividend payout ratio of 50%, we can expect a dividend of Rp600/sh, or a dividend yield of 7.2% in relation to the shares’ closing price at Rp8325/sh on 15 January 2018.

No Problem in Asset Quality

ADMF has been able to keep its NPL below 2% even in the economic downturn in 2015, where many finance companies face very high provisioning amidst declining asset quality. At 1Q17, ADMF has an NPL of 1.57%, down from 1.77% in 1Q16. ADMF has a policy of considering an asset non-performing when it 90 days past due, and an automatic write-off policy after 210 days due.

Conclusion

At Rp8325/sh, ADMF offers a 14% earnings yield, where earnings are near a peak cycle. Although ADMF has had a fantastic record in terms of profitability, given its bleak long-term outlook, I choose to be conservative and assign a low multiple of 8x 2017 earnings as its fair value. This leads to a fair value of Rp9,600/sh, a 15% upside on the closing price on 15 January 2018. In the meantime, ADMF’s dividend will be a catalyst for the stock. ADMF usually pays a dividend around 24-28 May.

 

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