Orix leasing Pakistan Ltd (OLPL) seems to be turning into a giant in the small leasing sector and offers a significant upside potential based on relative valuation. The key triggers for the company that back our investment thesis for OLPL are, 1) Expanding volumes signaling imminent core income growth, 2) diversified and expanding product line, 3) strong growth in the share of profit from its associates, 4) strong credit rating assisting its cost of funds, 5) rising provision coverage and 6) cheap valuation compared to peers and the market as a whole.
15% and 26% YoY growth in its business volumes in FY13 and 9MFY14, respectively, robust growth in core income is well on the cards despite slowdown witnessed in Financial lease (mainly Auto lease). Going forward, Auto leasing is projected to pick up pace, complementing the growth being witnessed in operating lease. Moreover, the company’s inclination to diversify its revenue stream by focusing on operating leases and its e-business, which has major clientele like PSO and Engro, is expected to yield positive results in the future. 9MFY14 net earnings showed a remarkable growth of 61% YoY (PKR4.63/share) led by 1) 18% YoY rise in income from the operating lease segment, 2) 37% rise in the share of profit from its associates and a 3% YoY decline in its financial costs.
Price to earnings ratio (PER) comparison shows that OLPL has significant upside potential. OLPL is currently trading at a 9MFY14 annualized P/E of 5.14x, well below the market P/E of 8.6x and the sector weighted average P/E (excluding OLPL) of 8.57x, implying significant undervaluation in the stock. In line with the market and sector weighted valuations, we believe the stock offers an upside potential of 67% from current levels with a PER based target price of PKR53/share. We expect the stock to continue its outperformance on the back of robust fundamentals.