Home Capital Group Inc HMCBF

Primary Symbol: T.HCG

Home Capital Group Inc. is a Canada-based holding company that operates through its principal subsidiary, Home Trust Company (Home Trust). Home Trust is a federally regulated trust company offering residential and non-residential mortgage lending, securitization of residential mortgage products, consumer lending and credit card services. In addition, Home Trust and its wholly owned subsidiary, Home Bank offer deposits through brokers and financial planners, and through a direct-to-consumer brand, Oaken Financial. Its mortgage lending includes classic single-family residential lending, insured residential lending, residential commercial lending, and non-residential commercial lending. Its consumer lending loan portfolio comprises credit cards, lines of credit and other consumer retail loans. In addition, the Company manages a treasury portfolio to support liquidity requirements and invest excess capital.

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Home Capital Group Inc

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Post by retiredcfon Jul 09, 2021 9:03am

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Post# 33520378

TD Upgrade

We are updating our target prices and tweaking some of our estimates (no rating changes). We are shifting our pecking order slightly to reflect YTD share- price performance, valuation, and the near-term outlook.

Home Capital is now our top pick (BUY-rated), followed by Equitable Group (BUY), Atrium MIC (BUY), and Firm Capital (BUY). We have HOLD ratings on First National and Timbercreek Financial. Our target price for Home Capital moves up to $48.00 (from $43.00) due to a higher multiple (1.2x-1.3x 4QF BVPS, up from 1.1x-1.2x). This reflects the material excess capital on Home Capital's balance sheet (~$9.59/share) and our expectation that capital returns will begin in the near term. We are maintaining a positive view of Equitable's medium-term outlook, but we see less near-term upside (vs. Home Capital), given the YTD share-price strength (+37% vs. +23% for Home Capital) and valuation (1.4x P/B vs. 1.1x for Home Capital).
Although housing activity remains elevated, it has pulled back somewhat from record levels in March 2021. Sales activity in April/May 2021 is up 162% y/y (pandemic restrictions weighed heavily on Q2/20 activity), and for context, it is up 37% vs. April/May 2019. That said, activity fell m/m in both April 2021 (-3%) and May 2021 (-8%), and the GTA and GVA markets showed further m/ m declines of -7% and -12%, respectively, in June 2021. We believe that activity will moderate going forward, given affordability pressure (house prices are up 24% y/y in Canada) and the expectation of rising interest rates. The sales-to- new-listings ratio (SNLR) has consistently declined since peaking in January 2021, suggesting that house-price growth will moderate. The consensus outlook of improving employment trends suggests a healthy backdrop for credit trends.
Year-to-date share-price performance has been strong, with companies under our coverage up in the range of 9% (Timbercreek) to 37% (Equitable Group). Valuations are generally higher than L3Y/L5Y averages. We believe that this is justified, given the outlook of constructive earnings growth, solid credit trends, and healthy capital returns. We are forecasting healthy dividend increases/ buybacks from OSFI-regulated entities (HCG and EQB) to start in Q1/22 (but it could be as early as Q4/21). The MICs group (FC, AI, and TF) are trading at a 6.5% dividend yield spread (vs. the two-year bond yield), which is in line with the L5Y average of 6.5%.