Allco Finance Group (AFG) Stock Recommendation

Allco Finance Group (AFG) have an Outperform stock recommendation and an increased share price target of $13.70 from Macquarie Research Equities (MRE). The company has "superior and increasing returns (RONTA 28%)" because of the "healthy investment banking climate" and so Allco Finance (AFG) remains one of MRE's best recommendations. "The current high debt position is manageable and should materially reduce as Allco Finance realises the assets into Allco managed funds.

Allco Finance Group (AFG) has announced its $500m equity issue consisting of a $256m institutional bookbuild and a $246m entitlement issue (2 for 19). Macquarie Research Equities (MRE) believe with the increase this provides to borrowing reserves and the 40 percent growth in staff numbers over the past five months, Allco will be able to move quickly on their healthy deal pipeline. AFG has maintained its FY07e guidance of "at least 20% growth", however MRE remains confident that their FY07e EPS growth forecast of 36% can be met or exceeded by Allco. MRE expect the $500m equity issue to allow Allco to increase its borrowing reserves by $800m and move quickly on the healthy deal flow pipeline. Allco has clearly signalled that this may be the last equity issue for some time with future capital demands to be funded by both internal reserves and its proposed specialist funds. MRE believe the speed and success in Allco selling the $6bn of assets from its balance sheet into Allco managed funds is one of the key share price catalysts, as it would materially reduce the Allco capital intensity and lift shareholder returns.Staff numbers now at 359, 40% growth in five months. most of the Allco employee growth has occurred in Allco’s six offshore offices and this hints to MRE that this plus the equity issue could be a pre-cursor to a potential significant transaction. A further $2bn in new specialist local and international funds are targeted to be rolled out by the end of FY07 to take assets under management to $7bn. MRE believe Allco is likely to co-invest in these funds to better align Allco’s interests with the third-party investors.Equity issue should be EPS accretive but AFG maintains guidance. AFG has maintained its FY07e guidance of “at least 20% growth”, but to MRE this appears far too conservative given a pre-tax return of just 11% on the $500m of equity funds is required for this to be an EPS neutral transaction. Allco did note that in the short term, the funds will be used to repay mezzanine and senior bank debt. Therefore, we have conservatively assumed modest returns, leaving our EPS forecasts only marginally upgraded. MRE remain confident that their FY07e EPS growth forecast of 36% can be met or exceeded by Allco.

Allco Finance Group Limited is listed on the Australian Stock Exchange (ASX) under stock code AFG. You can view their investor website here. AFG was listed on the ASX on 28 February, 2001. AFG is a diversified financials company involved in investing in businesses & assets which cover niche financial products such as equipment leasing, securitisation, funds management, placement and underwriting of financial risks and other structured financial investments in order to provide an alternative exposure to the financial services industry. Find out the meaning of the recommendations in this primer. Browse for other stockbroker recommendations. Check your charts and good luck with your share trading!