First National Financial Corporation

First National Financial Corporation (TSX: FN) is a leading Canada based mortgage originator, underwriter and servicer of prime residential and commercial mortgages. 

Key Highlights:

• An income play: The stock carries a dividend yield of ~5.33%, which is lucrative considering the current interest rate scenario. Notably, the group paid a total dividend of CAD 65.526 million in H1FY21, higher than the CAD 59.994 million in pcp.
• Bullish management stance: Despite the ongoing challenges, group reported strong topline (CAD 379.802 million in H1FY21 v/s CAD 251.161 million in pcp) and bottom-line (CAD 104.976 million v/s CAD 48.589 million in pcp) growth, which is encouraging. The management believes that the momentum would continue in the rest of FY21, supported by strong relationships with mortgage brokers and diverse funding sources. Moreover, the company is receiving additional interest from institutional investors as a result of the substantial amount of liquidity in the financial system.
• Higher MUA despite sluggish economic scenario: At the end of Q2FY21, the company reported its mortgage under administration at CAD 121.5 billion, which is 6% higher on a y-o-y basis. The growth was supported by higher mortgage origination from both its primary and third-party mortgage servicing contracts.

Q2FY21 Financial Highlights:

• FN announced its first quarter result, wherein the company posted revenue of CAD 202.749 million, higher than CAD 166.637 million in the previous corresponding period (pcp). The increase was supported by higher mortgage servicing income and an improved revenue from placement fees segment.
• Income before income taxes stood at CAD 70.101 million, as compared to CAD 68.944 million in pcp. The growth was supported by changes in the fair market value of financial instruments related to interest rate movements as compared to previous quarters.
• The company reported its net income at CAD 52.401 million, improved from CAD 50.844 million in pcp.

Q2FY21 Income Statement Highlights (Source: Company Report)

Risks: The company’s profitability is dependent on current bond markets rates, which affect the value of gains and losses on financial instruments arising from the Company’s interest rate hedging program. Thus, interest rate plays a vital role for the business and volatility in the interest rate might dampen the company’s performance.

Valuation Methodology (Illustrative): Price to Earnings

Stock Recommendation:

The company reported a strong quarterly performance driven by a resilient housing market across Canada coupled with 71% higher single-family origination from the previous corresponding period. Moreover, the company holds a strong market share in the mortgage broker distribution channel driven by long-time broker relationships coupled with effective technology. We have valued the stock using the P/E-based relative valuation method and have arrived at single-digit (in percentage terms) upside. For the said purposes, we have considered industry (Financials) median multiple on NTM basis. Considering the aforesaid facts, we recommend a ‘Hold’ rating on the stock at the closing price of CAD 44.08 on September 17, 2021.

One-Year Technical Price Chart (as on September 17, 2021). Source: REFINITIV, Analysis by Kalkine Group

Disclaimer

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