Singer Finance (Lanka) Ltd – SFLL

Initial Public Offering

3rd December 2010

No of securities to be issued 26,666,667 Singer Finance (Lanka) Ltd (SFLL) is a

ordinary voting registered finance company (RFC) under the
shares Finance Companies Act No 78 of 1988. SFLL is
Issue price
currently categorized as a medium-sized RFC
Rs 15.00
by the Central Bank of Sri Lanka with an asset
Opening of offering 15th December 2010 base of Rs 3.4 Bn as of 31 August 2010.
Earliest closing 15th December 2010
Latest closing 4th January 2011 Industry

Registered Finance Companies (RFC) play a

Initial Public Offer
The company would be listed on the Main
Board of the Colombo Stock Exchange
subsequent to the Initial Public Offer. The
minimum subscription per application is 100
shares, while applications exceeding minimum
subscription should be in multiples of 100
shares.
The allotment of the shares will be decided by
the Board of Directors.
vital role in the provision of financing facilities
to a broad customer base, particularly to those
who lack easy access to bank finance facilities.
As of end-2009 a total of 35 RFCs were carrying
out operations in the country, and accounting
for an asset base of Rs 185 Bn, roughly 7% of
the assets of the financial system.
Asset Base of RFCs (2009)
36% 32%

The financial advisor and manager to the issue

is NDB Investment Bank Ltd.

Shareholders Subsequent to Offering No of shares % Holding

Singer (Sri Lanka) PLC 79,999,988 74.99%
6%
Public Holding 26,666,667 25.00%
26%
Other 12 0.01%
Hire Purchase Leasing Real Estate Other Loans and Advances

Source: CBSL
NDB Stockbrokers (Pvt
(Pvt.
Pvt.) Ltd and NDB
Investment Bank Ltd are subsidiary RFCs are primarily engaged in providing
companies of National Development Bank leasing facilities. However, the entry of
PLC licensed commercial banks into this segment
has caused a minor drawback for RFCs as
banks are in a position to offer leasing facilities
at attractive rates, given their access to low-
cost funding. In 2009, the total leasing facilities
advanced by RFCs dropped a marginal 1% to
Rs 35 Bn.

The hire purchase segment on the other hand

posted a modest growth of 0.32% in 2009 to Rs
43 Bn, and has grown at a CAGR of
approximately 39% from 2004 to 2009. The real
estate segment, however, posted a 22% decline
in 2009 to Rs 8 Bn amidst a depressed real
estate market.

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 Products of SFLL
Growth in Assets of RFCs (2002-2009)

Rs Bn Product Portfolio of SFLL (As of August

50 2010)
45
40
35
15%
30
25 44%
20
15
10
5
0
2002 2003 2004 2005 2006 2007 2008 2009
41%
Hire Purchase Leasing Real Estate

Source: Central Bank of Sri Lanka

Consumer loans Hire purchase Leasing

In 2009, the total provisioning of RFCs for bad
and doubtful debt rose a sharp 65%, which Source: Company Prospectus
could be attributed to the adverse macro
economic conditions that prevailed in the Leasing – provides leasing facilities for
country. unregistered commercial and passenger
vehicles.
Deposit Mobilization of RFCs (2002-2009)
Hire purchase – provides hire purchase
Rs Bn
facilities for registered vehicles and
140 agricultural equipment.
120
Consumer loans – provides consumer loans
100 through Group Sales and SINS customers.
80
Group sales – provides credit facilities by
60 partnering with different organizations to offer
40 easy payment schemes for their employees.
20

0 Growth in SFLL’s Asset Base (FY06/07-

2002 2003 2004 2005 2006 2007 2008 2009 FY09/10)
Rs Bn
Source: CBSL and NDB Stockbrokers
2.0

Company
1.5

SFLL was incorporated in 2004 as a subsidiary

1.0
of Singer (Sri Lanka) PLC (SINS) with the
primary objective of carrying out the finance
0.5
function of the parent company. SFLL was
subsequently licensed as an RFC.
0.0
FY06/07 FY07/08 FY08/09 FY09/10
The principal business activities of the
company includes acceptance of deposits from Hire debtors Lease rentals Loans

the general public, advancing of leases, hire

purchase facilities and consumer loans. The asset base of SFLL is funded mainly
Additionally, SFLL is SINS’ strategic business through deposits. Its deposit base has grown at
partner in strengthening SINS’ consumer a CAGR of 51% from FY06/07 to FY09/10.
financing business.

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 Financial Analysis
Funding Sources of SFLL (As of August
2010) FY08/09 FY09/10 FY10/11
Figures are in Rs Mn (5M)
Revenue 460 704 397
17%
Net Profit 13 54 47

53%
EPS* 0.32 0.96 0.62
BV* 5.54 5.82 6.45
DPS* 0.25 0.25 0.25
30%
Debt/Equity 88.37% 84.58% 83.45%
NPL 3.74% 2.69% 1.91%
Capital Adequacy Ratio 11.79% 15.43% 16.10%
*Adjusted for the share split
Public Deposits Loans Equity

Hire receivables as at 31 August 2010 had

SFLL’s Collaboration with SINS
As SINS’ strategic business partner SFLL
provides financing to customers of SINS for the
purchase of consumer durables. While SFLL
provides the financing, SINS administers the
collection of repayments in return for a
commission and an administrative fee from
SFLL. The terms of this agreement have been
agreed upon in a 3-year contract the two
companies had entered into in October 2010.
The agreement is renewable at the discretion
of both companies.
SFLL operates with a distribution network
comprising of six branches and six service
centres which house within SINS sales outlets.
Financing of consumer durables is carried out
through SINS’s 345 outlets island wide.
Group Strengths
increased 25% to Rs 1,298 Mn, while lease
rental receivables had risen 15% to Rs 465 Mn
from end FY09/10. Loans had dropped 11% to
Rs 1,372 Mn.
Deposits have increased a modest 9% from end
FY09/10. However, the amounts due to related
parties (parent company SINS) and interest
bearing borrowings had dropped by 9%, and
13% respectively. Total equity of the company
rose 11% from end FY09/10.
The net interest margin (NIM) for the period
was 18.49%, compared to an NIM of 12.61% in
FY09/10 amidst an increase in the net interest
spread to 13.98% from 10.05% in FY09/10.
SFLL posted a net interest income of Rs 248.9
Mn, up 175% YOY for the first five months of
FY10/11, supported by a 59% increase in
interest income and an 18% drop in interest
expense, due to improvements in the asset
base and NIM.

SFLL is backed by the diversified multinational
company Singer. The brand “SINGER” dates
back to 1851 and has been a household brand
name in Sri Lanka for over 150 years, and has
gained much recognition for its excellence.
Further, SFLL is exposed to the vast customer
base of SINS through its consumer lending
segment, which attracts higher interest rate
margins compared to leasing and hire
purchase.
Additionally, the ability to draw from the
expertise of the SINS management and to
benefit from the economies of scale by being
associated with SINS also place SFLL at a
competitive advantage among its peers.
Provision for bad and doubtful debts for the 5
months ended 31 August 2010 declined 31%
YOY to 10.6 Mn, while bad debt worth Rs 6 Mn
was recovered. Its net profit for the period
stood at Rs 49.7 Mn, up 61% YOY. SFLL’s net
profit for the five months stood at Rs 49.7 Mn,
up 598% YOY.
SFLL’s gross NPL ratio as at 31 August 2010
was 1.91%, down from 4.57% from a year ago,
well below the industry NPL ratio of 11.7% as at
31 June 2010. Meanwhile the gross NPL
coverage has improved from 51.09% to 72.49%
in FY09/10.

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Proceeds of the IPO
SFLL plans to raise Rs 400 Mn in the IPO. The
proceeds of the IPO would be used to part
finance the loan disbursements of the company
for the remainder of FY10/11. Further, SFLL
plans to utilize the proceeds of the IPO before
the end of FY10/11.
Growth Prospects
SFLL expects the economic growth of the
country would increase demand from middle
to low income earners, which would drive
demand for leasing facilities.
companies may affect SFLL’s market share and
interest spreads.
Financial Forecast and Valuation
Valuation
We have assumed an NIM of 16% and 14% in
FY10/11 and FY11/12 respectively (assuming
that the current level of 18.49% is not
sustainable). Further, we forecast a 40% and
35% growth in SFLL’s asset base, respectively,
in FY10/11 and FY11/12. Accordingly, the profit
after tax is estimated at Rs 125 Mn for FY10/11
and Rs 177 Mn for FY11/12. Thus we estimate
an EPS of Rs 1.45 in FY10/11 and Rs 1.66 in
FY11/12.

Furthermore, SFLL anticipates the increased
activity in the second-hand vehicle market (as
vehicle owners try to switch to brand new
vehicles spurred by import tax reductions on
vehicles) as well as the revival of the
agricultural sector would drive growth in the
hire purchase segments.
We have employed a weighted P/E of 12.2X
(based on earnings estimates for FY11/12),
taking into consideration the P/Es of Central
Finance (50% weight), LB Finance (15%) and
Vallibel Finance (35%). Accordingly we
estimate an intrinsic value of Rs 20.25 per
share. BUY

Taking into account government measures to

increase per capita income levels from US $
2,053 as of end 2009, and the anticipated
economic growth, we expect a surge in
demand for white goods from low and middle
income earners, a situation that would bode
well for the consumer lending segment of
SFLL.

The company plans to increase the total

number of its branches and service centres to
24 by 2015, and to expand its lending portfolio,
capitalizing on the growth prospects of its
business segment.

Further, the budget proposals to reduce the

Financial Services VAT from 20% to 12%, and
corporate tax in general from 35% to 28% would
bode well for the profitability of SFLL going
forward.

Risks

Any changes to the current 3-year agreement

between SINS and SFLL with regard to
consumer financing facilities extended to SINS
customers may affect the profitability of the
company (after 3 years). However, with an
established global brand name, it is unlikely
that SINS will let minority shareholders of SFLL
be affected.

Increased competition from peers as well as

licensed commercial banks and leasing

4
 FY10/11
Income st a t ement FY07/08 FY08/09 FY09/10 5M
Figures are in Rs '000
Income 286,896 460,349 703,915 396,523
Interest income 254,338 396,533 639,159 365,185
Interest expense (146,620) (283,228) (316,422) (116,207)
N et int er est incom e 107,717 113,305 322,737 248,978
Other operating income 32,558 63,816 64,756 31,338
P r of it f r om op er a t ing a ct ivit ies 140,275 177,121 387,493 280,316
Staff cost (30,304) (43,334) (42,947) (25,766)
Administrative and selling expenses (48,355) (83,815) (206,707) (137,495)
Provision for bad and doubtful debt (16,175) (20,585) (30,320) (10,598)
Recovery of bad debt - 45 1,200 6,035
VAT on Financial Services (5,041) (13,011) (21,700) (19,150)
P r of it b ef or e t a x 40,399 16,422 87,019 93,342
Income tax expense (3,980) (3,691) (32,900) (43,667)
N et p r of it 36,419 12,731 54,119 49,675

As a t
B a la nce sheet FY07/08 FY08/09 FY09/10 31.08.2010
Asset s
Cash and bank balances 100,115 2,498 17,336 7,271
Government securities - 169,211 156,758 166,864
Hire receivables 590,600 877,156 1,041,042 1,298,499
Lease rental receivables 418,998 437,275 404,762 464,712
Loans 205,512 477,374 1,535,276 1,371,585
Investment securities 41 41 41 41
Other debtors and prepayments 69,526 81,397 61,954 81,845
Property, plant and equipment 18,142 24,566 22,928 24,176
Intangible assets 10,749 8,978 7,314 8,588
Deferred tax assets - - 5,677 -
Tot a l a sset s 1,413,684 2,078,496 3,253,088 3,423,582

L ia b ilit ies
Public deposits 642,198 1,097,979 1,518,043 1,655,811
Trade and other payables 112,407 154,372 189,845 236,989
Amounts due to related companies 4,879 223,781 997,250 907,443
Interest bearing loans and borrowings 386,584 362,126 40,017 34,904
Current tax liabilities - 55 29,377 20,108
Retirement benefit obligation 1,643 2,843 3,751 4,351
Deferred revenue 4,082 7,024 9,024 10,531
Deferred tax liabilities 15,440 8,654 - 37,990
Tot a l lia b ilit ies 1,167,234 1,856,835 2,787,308 2,908,127

Eq uit y
Stated capital 200,000 200,000 400,000 400,000
Capital reserve 3,013 8,042 10,748 10,748
Accumulated profits 43,437 13,618 55,031 104,706
Tot a l eq uit y 246,449 221,661 465,779 515,454

Tot a l lia b ilit ies a nd eq uit y 1,413,684 2,078,496 3,253,088 3,423,582

5
 N D B Stockbrokers (Pvt) Ltd
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Prasansani Mendis
prasansini@ndbs.lk

Research Sales

Waruna Singappuli Gihan R. Cooray

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gihan@ndbs.lk

Viranthi Kumarage
Kumarage Aroos Faleel
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Ranmini Vithanagama Channaka Munasinghe

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Sanjaya Prabath Auburn Senn

sanjaya@ndbs.lk auburn@ndbs.lk

Jayantha Samarasinghe
Samarasinghe
jayantha@ndbs.lk

Sidath Kalyanaratne
sidath@ndbs.lk

Uditha De Silva
uditha@ndbs.lk

Taamara De Silva
taamara@ndbs.lk

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