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

Why should Investor’s Book Profit?

• Poor Margins: The company has shown deteriorated margin as compared to industry, whereas the company’s gross Margins for Q3 FY21 stood at 36.3% v/s industry median of 89.1%. Operating margins for the company recorded for the quarter was 18.4% v/s Industry median of 46.8%. Moreover, the company’s Net Margin was lower at 13.5% v/s Industry median of 36.3%.

• Highly Leveraged: The company is highly leveraged as compared to the industry, where the company’s Debt/Equity ratio for Q3 21 was 72.95x which is too high against the Industry Median of 0.25x. Also, the % LT Debt to Capital ratio during the third quarter of FY 21 for company stood at 91.1% while the industry median was 6.3%.

• Decline in placement fees: During Q3FY21, the company reported a 14% y-o-y decline in the placement fees to CAD 85 million, despite a 12% y-o-y growth on mortgage origination volumes due to lower mortgage spreads, and volumes sold on a funded basis attracted lower per-unit placement fees. Continuation of the above trend is likely to impact the company’s overall performance.
  

• Sluggish Guidance: For the fourth quarter of FY21, the company expects a decline in new origination on y-o-y basis, due to slowdown market conditions. Moreover, residential origination in Q4FY21 might be ~25% lower on y-o-y basis due to the slowdown in home purchasing.

Stock Recommendation:

The company witnessed a surge in the input cost during Q3FY21, and posted its total expense of CAD 130.698 million, significantly higher than CAD 107.520 million in pcp, due to an increase in Brokerage fees, Salaries & benefits expense coupled with Other operating costs. Hence, the net income dived to CAD 47.614 million in Q3FY21, from CAD 72.517 million in pcp. Continuation of the above trend would dampen the company’s profitability and cash flows.

Considering the aforesaid facts, we recommend a ‘Sell’ rating on the stock of FN at the closing price of CAD 42.86 on January 06, 2022.

One-Year Price Chart (as on January 06, 2022). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

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