Home Capital Group Inc.
Okay, so you’ve got lots of capital. That Does Impress Me Much
Our view: HCG is a Top 3 best idea within our coverage. We view the shares as mispriced, trading at 1.25x P/BV despite our forecast that HCG’s ROE could reach almost 16% in 2023 following HCG’s planned substantial return of capital plans that we estimate could see ~$15/share returned to shareholders in 2022. Coupled with positive fundamentals and a favorable industry backdrop, we see significant valuation upside over the next 12- months. We increase our price target to $57 (was $53) and maintain our Outperform rating.
Key points:
HCG announced details of its $300MM substantial issuer bid (SIB) with a pricing range of $43.50 to $48.50. The offer is for a maximum repurchase of 6.9MM shares, representing ~13.7% of HCG’s shares outstanding and expires at 5pm ET on December 21, 2021. Pricing will be determined based on the lowest price that will allow HCG to repurchase the most amount of tendered shares and having a total purchase price not exceeding $300MM.
Post-SIB, we estimate an 18.6% CET1, still well above HCG’s 14-15% target that it plans to reach by the end of 2022. HCG has not disclosed specifics regarding additional returns of capital, but our 2022 forecasts assume: (1) re-instating the quarterly dividend, which we assume $0.60/ share annualized (~1.5% yield, 12% payout ratio), vs. no dividend currently; (2) repurchasing 10% of shares via its NCIB; and (3) a $200MM substantial issuer bid for Q4/22. Collectively, these returns of capital increase our 2023 ROE by ~+500bps to almost 16%.
Home Capital is hosting an Investor Day in Toronto on Tuesday, November 23 at 2pm EST.
Q3/21 normalized EPS of $1.09 was slightly below our forecast of $1.14, but above consensus of $1.07 (consensus range of $0.96 to $1.15). Relative to our forecast, HCG reported lower-than-forecast net interest income, but partly offset by a slightly stronger PCL reversal. On a pre-tax, pre-PCL basis, normalized EPS of $1.43 was also slightly below our $1.49 forecast.
Increasing 12-month price target to $57/share (was $53) and maintaining our Outperform rating. The increased target primarily reflects a higher P/ BV multiple (1.5x, was 1.3x) due to our higher ROE forecast.