First National Financial Corp T.FN

TD Direct downgrade

[felix10]

Event

Q3/21 Conference Call

Impact: NEGATIVE

For income seeking investors, First National continues to be a very rewarding

investment. The $1.25/share special dividend announced (paid in Q4/21) reinforces

this theme, in our view (well ahead of $0.60/share estimate, and up from $0.50/

share in 2019 and 2020). In 2021, we have underestimated the earnings headwind

of tighter mortgage spreads and higher expenses, which have more than offset

strong origination volumes (+27% ytd), including volumes driving placement fees

(+23% ytd). EPS of $3.85 in 2020 may been a peak and now, we are not forecasting

EPS to surpass this mark until 2023 ($4.00/share estimate). We have materially

reduced our estimates to reflect expectations for tighter spreads and higher

expenses to persist. Our target moves to $43 (from $49; multiple unchanged).

We maintain our HOLD rating.

First National has missed our estimates, and consensus, for three quarters

in a row. This reflects a combination of poor earnings visibility due to inquarter funding mix allocations, increased competition in 2021 leading to tighter

mortgage spreads (vs. 2020), and higher-than-expected expenses (brokerage

fees, salaries, and other expenses). Our 2021-2023 EPS estimates have come

down by 12% on average (vs. our previous forecast).

Origination volumes continue to be a bright spot, although guidance

suggests Q4/21 will be lower than expected. Q3/21 volumes of $8.4bln were

in-line with our $8.5bln forecast (up 10% y/y). Q4/21 guidance is weaker than

expected (residential volumes could be off 25% y/y, while commercial volumes

are expected to "remain strong").

The special dividend of $1.25/share is well received. We have increased our

special dividend forecast to $1.00/share for 2022/2023 (up from $0.60/share).

TD Investment Conclusion

First National is a solid income-generating investment (8.4% dividend yield, including

the announced special dividend). Mortgage spread tightening and rising expenses

suggest near-term earnings potential is lower than 2020 levels, in our view. We

continue to value First National's low credit risk 'originate-to-sell' mortgage model

and strong origination capabilities. We see origination growth potentially moderating

in 2022. We view valuation at 11.9x 2022E EPS as fair.

 

[porksniffer]

National Bank, BMO and RBC have also joined the downgrade train. How does the 2 day chart look? I lost $6/share but I'm getting $1.25 dividend!!

[Shirtlessnomore]

It's understandable that you are frustrated but you can simply push the sell button and stop your loss. This is one of the problems with a small float however it can move both ways fast so a change of direction would be welcome. Cheers

[Kylemcc10]

Average down then. If you can't, well sounds like you bit off more than you can chew. I'm a happy buyer here. God if you're mad over two days of owning a stock you really shouldn't be investing. Especially over a company that consistently rewards shareholders who hold.