The Financial Grimes: 28 June 2019

This top City analyst reviews the financial sector stocks making headlines today.

Jeremy Grime spent 15 years as a financial sector analyst, working at Altium Capital,RBC Capital Markets, Panmure Gordon and most recently asDirector of Researchat finnCap. Jeremy is also a qualified accountant.

Jeremy's blog is written with more experienced investors in mind. However, we have included a brief glossary at the bottom of the page to help those less familiar with some of the language used. For more on key financial metrics and valuation ratios clickhere.

AFH Financial – Issue of Convertibles 

Share Price: 360p

Mkt Cap: £153 million

Conflict Disclosure : No holding

AFH Financial (LSE:AFHP) offers financial advice and investment management.

Placing - The company is placing by accelerated bookbuild £20 million of 2024 CULS with a yield of 4% and conversion price of 420p, which is a 16.7% premium to the current share price, in order to fund its ongoing pipeline of acquisitions.

Valuation of CULS - PE on the existing equity is 10.6X and yield is 2.6%. So the 40% uplift in the yield on the CULS above the equity yield is valued at a 17% premium to the share price. In money terms, the premium on the CULS is 60p and the yield uplift today is effectively 4.5p above this years expected dividend of 8.35p. With the dividend forecast to rise at 20%, the crossover would be three years away when convertible holders would logically convert to gain a yield uplift.

Conclusion - This underlines that both AFH and Harwood Wealth Management (LSE:HW.) shares are too cheap to issue equity at the moment so the equity market is effectively closed to them. And this seems like a very sensible way round the issue.

However, it does effectively introduce gearing in a space that traditionally runs with net cash. Should something go wrong, the convertible unsecured loan stock (CULS) will need to be repaid at par in 2024 which could cause a problem in extreme situations. I suspect that won't help the rating of the shares, but the extra gearing provides leverage to the upside too. This now differentiates Harwood and AFH by risk preference. However, both appear to be hugely undervalued given flows in the IFA space are stronger than they are in the platform space.

International Personal Finance – Poland Update

Share Price: 148p

Mkt Cap: £331 million

Conflict disclosure: No Holding

International Personal Finance (LSE:IPF) is a provider of home credit, or a 'doorstep lender'.

The uncertainties are huge but the valuation is also very persuasive.  Once we get clarity on the impact the valuation will change. My suspicion is the travelling is worse than the arriving, but until we get clarity on the impact we can't know that.

Update – Rate cap proposals have been modified to reduce the non interest cap on fees from 30% per annum to 10% per annum and from 25% of the loan value to 10% of the loan value.  These will need to go through the EU for review and comment and may further be modified. No assessment of the impact is provided.

Estimates – PBT is expected to grow 3% this year to £113 million. Currently, around 90% of this is from Europe of which Poland is a very material part but no longer separately disclosed.

Valuation - Per 5X yield 8.5%.  Price/Book value is 0.76X.

For information about Jeremy's 'deep dive' company analysis, you can email him atjeremy@charltonillingworth.co.uk

Jeremy Grime is an independent equity markets analyst and freelance contributor, not a direct employee of interactive investor.