First National Financial Corporation

Decent Increase in Revenue and MUA: First National Financial Corporation (TSX: FN) is the parent company of First National Financial LP, a Canadian originator, underwriter, and servicer of predominantly prime residential and commercial mortgages.

Quarterly Performance (For the Period Ended 30 June 2020): During the second quarter ended 30 June 2020, the company reported productive results with an increase of 5% in mortgages under administration to a record CAD 114.9 billion as compared to CAD 109.6 billion on 30 June 2019. In the same time span, revenue of the company went up by 3% to CAD 344.6 million and pre-FMV increased by 12% to CAD 75.5 million from CAD 67.6 million in Q2 FY19. This was mainly due to higher placement fees, an increase in mortgage servicing income, gains on deferred placement fee revenue offset by lower net interest revenue earned on securitized mortgages and decline in net interest revenue earned on securitized mortgages. Higher revenues resulted in an increase in net income to CAD 69.8 million. The company has also announced a monthly dividend of CAD 0.1625, which is to be paid on 15 September 2020.

Quarterly Financial Highlights (Source: Company Reports)

Outlook: The company is expecting relatively positive trends in the third quarter with higher seasonal residential origination, commercial segment success in originating lower volumes, and employment productivity from the company's work from home strategy.

Key Risks: The company is exposed to a variety of risks including higher project costs, differences in financial results, geographical and geological disruptions, changes in the interest rates, reliance on sources of funding, etc.

Valuation Methodology: Price to Earnings Multiple Based Illustrative Relative Valuation (Illustrative)

Price to Earnings Multiple Based Illustrative Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The company is confident of its relationships with mortgage brokers and will continue to generate income, and cash flow from its diverse mortgages pledged portfolio. As per TSX, the stock of FN is trading slightly above the average 52-Weeks’ level but retains the potential for further growth. The stock of FN gave a return of 15.26% in the past three months and a return of 2.55% in the past one month. We have valued the stock using the P/E multiple based illustrative relative valuation and have arrived at a target upside of lower double-digit (in percentage terms). Considering the current trading levels, decent returns in the past three months, positive long term outlook and decent financial performance, we recommend a ‘Buy’ rating on the stock at the current market price of CAD 33.15 on 31 August 2020.

FN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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