Paragon Banking Group Plc – Saw strong capital ratios with high levels of liquidity

Paragon Banking Group Plc (LON: PAG) is into the banking business and is a specialist in lending and offer a wide range of products related to savings.

On 8 June 2021, the Company will release its 2021 half-year results.

Rationale for Valuation - Hold at GBX 442.60

• The Company saw good momentum in new business flows, with strong growth in the pipelines (mainly for buy-to-let and development finance).
• The Board expects volumes and net interest margin to be unchanged.
• The Company has decent fundamental metrics as it has maintained a Net Margin and ROE (return on equity) above the industry median.
• As per valuation metrics, Price/Cash Flow and Price/Book Value multiples are currently lower than the Banking Services industry multiples.
• From a technical standpoint, 200-day SMA (GBX 392.30), 200-Day EMA (GBX 419.1) and 14-day RSI (31.77) supports an upside potential.

Key Risks

• The Covid-19 outbreak has impacted many of the customers’ business models and income.
• Several macroeconomic factors, including Brexit, could impact the state of economic recovery in the UK over the next two quarters and for the next year.

Trading Update (from 1 October 2020 to 31 December 2020, as on 29 January 2021)

• The Company stated that the trading performance was in line with the Board's anticipations.
• During the first quarter of 2021, the specialist buy-to-let volumes have remained strong and reached around £298.7 million, representing a £110.8 million reduction as compared with the corresponding period of the last year.
• In Q1 FY21, the total advances decreased from £684.9 million to £521.8 million, with net loan balances increased to £12.67 billion.
• At the end of the quarter, the buy-to-let pipeline increased by £152.8 million year-on-year, with a reduction in the redemption of 21.5% YoY.
• The Company witnessed strong commercial lending volumes, supported by the growth in SME lending in Q4 FY20.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Conclusion

In the coming quarter, the Company expects the buy-to-let pipeline to convert at a faster rate. In Q1 FY21, the deposit balances surged to £8.6 billion, with the portfolio average deposit rate of 1.22% at the end of December. PAG completed its PM28 securitisation during the quarter. The total capital ratios and unverified CET1 remained strong at 17.3% and 15.1%, respectively. Meanwhile, the Company stated that it had shown an encouraging start to the year, underpinned by the strong growth in the pipelines. Overall, PAG seems to be well-positioned to face the current challenges and opportunities ahead. The stock made a 52-week low and high of GBX 260.00 and GBX 504.50, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance on Paragon Banking Group Plc at the closing price of GBX 442.60 (as on 23 March 2021) and will recommend fresh buying at the right time.

Litigation Capital Management Ltd - Expects to increase the percentage of applications converted to investments

Litigation Capital Management Ltd (LON: LIT) is a Litigation Finance Company and is an alternate asset manager with expertise in investments pertinent to the global disputes market.

Rationale for Valuation - Hold at GBX 81.80

• The Company has increased the number of quality applications.
• It committed 64% of the first third party fund by 31 December 2020 and 70% by 8 March 2021, with the first resolution recognised shortly after the half year-end.
• The debt/equity ratio recorded by the Company in the past three years was considerably below the industry median. In H1 FY21, the debt/equity ratio was nil.
• As per valuation metrics, Price/Cash Flow and Price/Earnings multiples are currently lower than the Professional & Commercial Services industry multiples.
• From a technical standpoint, 20-day SMA (GBX 73.2) and 20-Day EMA (GBX 75.4) supports an upside potential. Also, MACD line is placed above the central line, indicating a bullish setup.

Key Risks

• Exchange rate fluctuations against USD can cause financial risk to the business.
• Change in the regulatory framework can also affect the growth prospects of the Company.
• The Covid-19 pandemic can lead to delays in the realisation of BUR’s assets.

Financial Highlights (for the half-year ended 31 December 2020 (H1 FY21), as on 16 March 2021)

• In H1 FY21, the Company delivered good progress in building scale across the business, with applications received around 266 (an increase of 5% YoY).
• The total invested capital stood at A$39.7 million during the period, bringing total invested capital to A$99.4 million (an increase of 189% YoY).
• Cash receipts from the completion of litigation investments increased by 15% YoY, and total equity was A$80.6 million.
• Total assets under management surged by 92% to A$322 million by 8 March 2021.

One Year Share Price Chart

 (Source: Refinitiv, chart created by Kalkine Group)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

The Company expects to increase in resolution of investments due to LIT’s portfolio matures. It has secured around USD 50 million of credit facility, which will accelerate growth in invested capital and provides additional capital to grow the Company. Despite the uncertainty caused by Covid-19, LIT has surged its capital demand, with increased applications for insolvency and restructuring disputes. Further, the market conditions are growing the demand for disputes finance. Over the past nine and a half years, it has attained a cumulative Return on Invested Capital (ROIC) of 135% and IRR of 78%. The stock made a 52-week low and high of GBX 51.20 and GBX 88.26, respectively.

Considering the uncertainties and market dynamics, we are currently maintaining the “Hold” stance on Litigation Capital Management Ltd at the closing price of GBX 81.80 (as on 23 March 2021) and will recommend fresh buying at the right time. 

*Dividend Yield may vary as per the stock price movement.

*All forecasted figures and Industry information have been taken from Refinitiv, Thomson Reuters.

Disclaimer

References to ‘Kalkine’, ‘we’, ‘our’ and ‘us’ refer to Kalkine Limited.

This website is a service of Kalkine Limited. Kalkine Limited is a private limited company, incorporated in England and Wales with registration number 07903332. Kalkine Limited is authorised and regulated by the Financial Conduct Authority under reference number 579414.

The article has been prepared for informational purposes only and is not intended to be used as a complete source of information on any particular company. No advice or information, whether oral or written, obtained by you from Kalkine or through or from the service shall create any warranty not expressly stated. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation.

Kalkine does not offer financial advice based upon your personal financial situation or goals, and we shall NOT be held liable for any investment or trading losses you may incur by using the opinions expressed in our publications, market updates, news alerts and corporate profiles. Kalkine does not intend to exclude any liability which it is not permitted to exclude under applicable law or regulation. Kalkine’s non-personalised advice does not in any way endorse or recommend individuals, investment products or services for your personal financial situation. You should discuss your portfolios and the risk tolerance level appropriate for your personal financial situation, with a professional authorised financial planner and adviser. You should be aware that the value of any investment and the income from it can go down as well as up and you may not get back the amount invested.