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All information contained herein is obtained by JMMB® Investment Research from sources believed by it to be accurate and reliable. All opinions and estimates constitute the Analyst’s judgment as of the date of the report. However, neither its accuracy and completeness NOR THE OPINIONS BASED THEREON ARE GUARANTEED. As such NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF THIS REPORT IS GIVEN OR MADE BY JMMB® IN ANY FORM WHATSOEVER. JMMBITT is a member of the JMMB Group and a registered broker dealer with TTSEC.

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RFHL Price & Volume (YTD)Volume Traded Closing Quote

Company Facts

Symbol: RFHL

Target Price: TT$130.59

Sector: Banking

Market Cap.: $19,810,861,207

Issued Capital: 162,637,396

Financial Year End:

30-Sep

Stock Performance

Banking YTD Price Change

Trailing Dividend Yield

RFHL 13.6% 3.6%

FCI 2.3% 4.2%

FIRST 18.9% 4.2%

NCBFG 21.9% 1.3%

SBTT -9.1% 5.1%

Sector Avg. 3.7%

Key Ratios

P/B ROE ROA Eff. Ratio

RFHL 2.08 13.8% 2.0% 50.5%

FCI 1.78 7.5% 0.9% 66.5%

SBTT 2.51 16.1% 2.7% 40.0%

FIRST 1.45 10.1% 1.7% 47.2%

NCBFG 2.89 22.7% 3.3% 51.4%

Valuation Report

September 2019 David Paul Investment Analyst [email protected]

Republic Financial Holdings Limited

(RFHL) PLEASE SEE IMPORTANT DISCLOSURES

Republic Bank Limited is incorporated and domiciled in

the Republic of Trinidad and Tobago. It is a member of the

Republic Bank Group, a financial services entity

comprising fourteen subsidiaries and four associated

companies. The Group is engaged in a wide range of

banking, financial and related activities in Trinidad and

Tobago, the Caribbean and Ghana.

Overvalued Fairly valued Undervalued

TT$134.51 TT$126.68

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Valuation Report

Company Overview

Republic Financial Holdings Limited (RFHL) is the

ultimate owner of the banks in the Republic Group,

which include: Republic Bank Limited, Republic

Bank (Guyana) Limited, Republic Bank (Barbados)

Limited, Republic Bank (Grenada) Limited,

Republic Bank (Suriname) N.V, Republic Bank

(Cayman) Limited, Republic Bank (Ghana),

Cayman National Corporation as well as Republic

Securities Limited and other subsidiaries.

Table of Content Company Snapshot…………………1 Company Overview…………………2 Business model……………………..4 Financial Analysis…………………..5 Recent Financial Performance……8 Expansion Activities………………10 Industry Overview…………………11 Valuing Financial Services Firms..12 Overcoming Valuation Issues……13 Quantitative Valuation……………14

DDM Insights……………..15 Simple P/E Insights………16 Simple P/B insights………16

RFHL Risk Factors……………….16 Limitations of Analysis……………17 Recommendation…………………17 Appendix…………………………..18

3


Originally called Colonial Bank, they began operations in 1837 as the first commercial bank in

Trinidad and Tobago. The bank has a 182-year track record of operation in the region. Significant

expansion during this period, through the acquisition of several subsidiaries, resulted in Republic

Bank performing dual roles of a licensed commercial bank and a holding company for its

subsidiaries. In December 2015, a decision was taken to form Republic Financial Holdings Limited

by a Vesting Order, under the Financial Institutions Act, Chap 79:09, of the Laws of Trinidad and

Tobago; bringing the structure of the Republic Group in line with international best practices (i.e.

form a holding company).

The Group currently employs more than 5,570 staff members in 16 subsidiaries in Trinidad and

Tobago, Grenada, Guyana, the Cayman Islands, Barbados, Ghana, and Suriname. Across these

markets, RFHL offers an extensive range of banking services, including credit and debit card

issuance and processing, leasing, trustee services, mutual fund and investment management, and

merchant banking.

10 Largest Shareholders Shares %

NIF Company 42,475,362 26.13

Clico Trust Corporation Limited 40,072,299 24.66

National Insurance Board 29,944,942 18.42

Trintrust Limited 14,936,298 9.19

RBC Trust 5,779,927 3.56

First Citizens Asset Management 3,360,733 2.07

Guardian Life of the Caribbean 2,630,568 1.62

UTC 2,416,858 1.49

Central Bank of Trinidad and Tobago 782,039 0.48

T Geddes Grant Ltd Pension Fund Plan 575,000 0.35

Valuation Report

4


58%

11%

2%

20%

5%4%

Revenue MixAdvances

Investment Securities

Liquid Assets

Fees & Commissions

Exchange Earnings

Other Income

Business Model

RFHL main source of income is earned by providing loans and generating interest income from

those loans. The types of loans RFHL issues include mortgages, auto loans, business loans, and

personal loans. Customer deposits, such as checking accounts, savings accounts, money market

accounts, and CDs, provide the entity with funding to issue loans. Customers who deposit money

into these accounts effectively lend money to the bank and are paid interest. However, the interest

rate paid by the bank on money they borrow is less than the rate charged on money they lend (the

banks borrow short and lend long to benefit from changes in yields).

At the end of financial year (FY) 2018 interest from loans and advances accounted for 58% of the

Group’s revenue, fees and commissions accounted for 20%, interest from investment securities

contributed 11%, while exchange earnings, interest from liquid assets and other income comprised

the remaining 11%.

Mortgages contributed TTD 16.1 billion of total loans and advances, while corporate &

commercial lending and retail lending accounted for TTD 13.9 billion and TTD 6.6 billion

respectively.

6.6 B

13.9 B

16.1 B

Retail Lending

Corporate & Commercial Lending

Mortgages

LOANS AND ADVANCES (ASSET)

Valuation Report

5


67%

14%

6%

9% 4%Loans Geographical Mix

Trinidad &Tobago

Barbados

Guyana

Cayman, Suriname & EC

Ghana

59 M66 M 67 M 69 M 70 M

85 M

51 M57 M 57 M 59 M 60 M

75 M

SEP-14 SEP-15 SEP-16 SEP-17 SEP-18 LTM JUN-19

Assets Vs Liabilities

Total Assets Total Liabilities

Loans and advances in Trinidad and Tobago was responsible for 67% of total loans and advances

issued by the Group. This indicates that the Group is highly exposed to the Trinidad and Tobago

market. The second largest contributor to loans and advances was Barbados, which issued 14% of

the Group’s loans and advances.

Financial Analysis

Since 2014, total assets of RFHL has increased by 45% at an annualized rate of approximately

7.8%. RFHL has experienced its most significant increase in total assets in the current financial

year (21.3%). This increase was mainly due to the acquisition of Cayman National Corporation

(CNC).

Valuation Report

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1.8%

9.4%

5.6%

2.8%

8.5%

22.5%

Trinidad &Tobago

Barbados

Guyana

Cayman & EC

Suriname

Ghana

NPL to Gross loans

Loans and advances which is RFHL’s main revenue driver also increased steadily over the last

five years. Since 2014, loans and advances increased by 63% at an annualized rate of

approximately 10.6%.

Total non-performing loans (NPL) in the Group stood at approximately TTD 1.6 billion as at the

end of FY 2018. The non-performing loans to gross loans ratio was 4.3%. Trinidad and Tobago

continues to maintain the lowest ratio in the Group at 1.8%. This bodes well for the Group given

their exposure to Trinidad and Tobago. RFHL maintained a provision coverage of 47.5% of its

non-performing facilities as at the end of FY 2018.

Valuation Report

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3.5%3.7%

5.1%

4.4% 4.3%4.5%

3.4%

3.9%

2.7%

3.3%

2.2%

1.8%

2.1% 2.2%2.3%

2014 2015 2016 2017 2018

NPL to Gross Loans

RFHL FIRST SBTT

47.5%

50%

45%

RFHL SBTT FIRST

Provision Coverage as a % of NPLs

Of the locally domiciled banks RFHL has the highest NPL ratio. This is as a result of very high

NPL ratios in Ghana (22.5%), Barbados (9.4%) and Suriname (8.5%).

The Group’s provision coverage of 47.5% of its non-performing facilities as at the end of FY 2018,

seems to be in line with the industry as SBTT and FIRST have provision coverages of 50% and

45% respectively.

Valuation Report

8


In 2018 ROE increased to 13.8% from 13.3% in 2017. This was partly due to an increase in

financial leverage; caused by a TTD 2.7 billion increase in deposits and other funding instruments

over the prior year. Profit margin also increased to 24.4% from 23.8% in 2017. The uptick in the

profit margin was due to an improvement in RFHL’s efficiency ratio from 52.0% in 2017 to 50.5%

in 2018.

2014 2015 2016 2017 2018

ROE 14.3% 14.1% 10.5% 13.3% 13.8%

Financial Leverage 6.79 7.01 7.01 6.78 6.98

Asset Turnover 0.07 0.06 0.08 0.08 0.08

Profit Margin 29.8% 28.9% 18.8% 23.8% 24.4%

Net Profit TT$1.2B TT$1.2B TT$0.9B TT$1.3B TT$1.3B

Assets TT$59.4B TT$66.0B TT$66.9B TT$68.8B TT$70.5B

Equity TT$8.7B TT$9.4B TT$9.5B TT$10.1B TT$10.1B

Revenue TT$4.0B TT$4.2B TT$5.0B TT$5.3B TT5.4B

Recent Financial Performance

RFHL 9 Month Ended June 2019

9 Month Ended June 2018 Change Change %

$'000 $'000 $'000

Net Interest Income 2,813,053 2,527,519 285,534 11.3%

Operating Income 4,094,853 3,648,448 446,405 12.2%

Operating Expense 2,260,454 2,004,080 256,374 12.8%

Operating Profit 2,277,057 1,650,119 626,938 38.0%

Credit Loss Expense 154,418 144,716

9,702 6.7%

Net Profit After Tax 1,327,178 1,056,277 270,901 25.6%

Diluted EPS 7.59 6.13

1.46 23.8%

RFHL reported diluted Earnings Per Share (EPS) of TTD 7.59 for the nine-months (9M) ended

June 30th 2019, a 23.8% improvement from the TTD 6.13 recorded in the prior comparable

period. RFHL’s net interest income grew from TTD 2.53 billion in 9M 2018 to TTD 2.81

billion in 9M 2019, a TTD 285.5 million (11.3%) increase. Other income also increased

14.35% to TTD 1.28 billion. As a result, operating income for the period stood at TTD 4.09

billion, up 12.2% YOY. This improvement was, however, tempered by a 12.8% (TTD 256.4M)

increase in operating expenses which climbed to TTD 2.26 billion. The bank benefitted from

a one-off write-back of a Post-Retirement Medical Benefit (PRMB) Provision of TTD 438.4

million, which bolstered operating profits to TTD 2.28 billion for the period (up 38% YOY).

Valuation Report

9


Adjusting for the one-off gain, operating profits would have been TTD 1.84 billion (up 11.4%

YOY). Credit loss expense increased by TTD 9.7 million or 6.7%, however RFHL recorded

profit before tax (PBT) of TTD 2.12 billion for the period, a 41.0% improvement over that of

9M 2018. Taxation expense edged slightly higher at TTD 450.2 million for 2019 as compared

to TTD 449.1 million in 2018 while the effective tax rate fell to 21.2% from 29.8% YOY.

Performance was also negatively impacted by one-off reversals of deferred tax assets (TTD

345.3M), resulting in net profit after tax for the period of TTD 1.33 billion, up 25.7% from the

TTD 1.06 billion recorded in 9M 2018. On an adjusted basis, net profits attributable to equity

holders would have been TTD 1.14 billion (up 14.7% YOY).

RFHL’s operating income has seen incremental improvements YOY over the past three

comparable periods. For the 9M 2019 period, RFHL’s operating income grew 12.2% YOY to

a total of TTD 4.09 billion as compared to TTD 3.65 billion reported in 2018. The strong

performance in 2019 was attributable to improvements in profitability across all geographic

segments but, most significantly, from their operations in Trinidad and Cayman Islands

through the recent acquisition of Cayman National Corporation. RFHL’s net interest income

has expanded by an annualized rate of 7.3% over the past 3 years, bolstered by a strong 2019

performance thus far. Likewise, other income has grown at an annualized rate of 6.3% per

year.

The Group’s PBT for 2019 jumped 41% to TTD 2.12 billion from TTD 1.51 billion. The most

significant contributors to this growth were RBL Trinidad and recently acquired Cayman

National Corporation. RBL Trinidad PBT surged 58.1% (TTD 1.16B) YOY, partly due to

adjustments to the terms of its PRMB plan, which resulted in a one-off write-back of TTD

438.4 million before taxes. On the back of the CNC acquisition, the Cayman Islands segment

saw PBT more than triple (up TTD 100.4M YoY), significantly adding to the Bank’s overall

profit from overseas operations. The Guyana segment also saw considerable improvements in

PBT, increasing 37% YOY. Suriname & EC and Ghana’s segments achieved moderate

improvements with PBT growth of 12% and 7% respectively, while the Barbados segment

remained relatively flat, growing just 1% YOY. Overall, PBT arising from overseas operations

grew 27.7%, now accounting for 19% of the Group’s overall PBT.

Valuation Report

10


Expansion Activities

On March 13th, 2019, RFHL completed the purchase of Cayman National Corporation shares.

The transaction comprised the purchase of 74.99% of the issued shares in CNC at an offering

price of US$6.25 per share by RFHL’s Barbadian subsidiary, Republic Bank Trinidad and

Tobago (Barbados) Limited. The overall cost of the transaction was US$198,474,012.50. As a

result of this transaction, the asset base of the RFHL Group will increase to approx. US$12

billion. For its fiscal 2018 (October 2017 to September 2018), CNC recorded profit after tax

of US$26.5 million. RFHL would have estimated significant synergies from the transaction as

the total cost of the transaction represents a valuation of 1.88 times the book value of CNC.

Given the surge in the share price of the stock since the initial announcement, the market seems

satisfied with the price paid. Since RFHL announced the proposed transaction on August 6,

2019, the share price has surged by 18.4% as at the date of writing (26/09/2019).

On November 27, 2018, RFHL announced that it has entered into an agreement to acquire

Scotiabank’s banking operations in Guyana, St. Maarten and the Eastern Caribbean territories,

including Anguilla, Antigua and Barbuda, Dominica, Grenada, St. Kitts and Nevis, St. Lucia,

and St. Vincent and the Grenadines. The purchase price is US$123 million, which represents

US$25 million consideration for total shareholding of Scotiabank Anguilla Limited; and a

premium of US$98 million over net asset value for operations in the remaining eight (8)

countries. This price does not include any amounts required to capitalize the branches post-

closing.

On September 10, 2019, the Eastern Caribbean Central Bank (ECCB), in consultation with the

Eastern Caribbean Currency Union (ECCU) Monetary Council, formally approved the

application for the transfer of the assets and liabilities of the Bank of Nova Scotia (BNS) to

RFHL in six ECCU territories, namely Anguilla, the Commonwealth of Dominica, Grenada,

St. Kitts and Nevis, St. Lucia, and St. Vincent and the Grenadines. Such approval does not

include the transfer of ‘BNS’ operations in Antigua and Barbuda.

One September 25, 2019, the Central Bank of Guyana denied RFHL plans to take over the

operations of Scotiabank in Guyana. Dr Ganga, the Central Bank Governor, stated that the

denial of the application for takeover by RFHL was due largely to the high level of

concentration of the banking system, noting that “it would lead to systemic issues” which

would have affected the health of the financial system in Guyana. This no doubt is a major

setback for RFHL as the Guyanese economy is expected to grow by 29.6% and 23.6% in 2020

and 2021 respectively. According to reports from Guyana’s Ministry of Finance, Republic

Bank currently holds 35.4% of the banking systems assets and 36.8% of deposits in Guyana

and the acquisition of Scotiabank would increase this to 51% of both assets and deposits. RFHL

should still expect significant growth out of its’ Guyana Subsidiary given the significant

growth in the economy which is expected due to the oil and gas boom.

Valuation Report

11


$20

$10

$13

$25

$10

$0 $10 $20 $30

RFHL

FIRST

FCI

NCBFG

SBTT

Billions

Market Cap

Industry Overview

The banking sector in Trinidad & Tobago is the largest sector trading on the local stock exchange

(58%) in terms of market capitalization. It comprises of 5 banks, namely, FirstCaribbean

International Limited (FCI), First Citizens Bank Limited (FIRST), NCB Financial Group Limited

(NCBFG), Republic Financial Holdings Limited (RFHL) and Scotiabank Trinidad & Tobago

Limited (SBTT). NCBFG is the largest bank in the sector (32% of market cap.), RFHL is the

largest locally domiciled bank on the exchange (25%). FCI, SBTT and FIRST make up 17%, 13%

and 13% of the market cap in the sector respectively.

The banking sector is currently trading at an average P/E multiple of 16.31 times, which is above

the T&T composite P/E multiple of 15.39 times. Average sector dividend yield stood at 3.84%,

well above the market average of 3.49%. RFHL has the lowest P/E ratio in the sector. Given the

pace at which RFHL is growing at in the region both organically and inorganically, the market

may be undervaluing RFHL when compared to its peers.

0.00%

1.00%

2.00%

3.00%

4.00%

5.00%

6.00%

0.00

5.00

10.00

15.00

20.00

25.00

FCI FIRST NCBFG RFHL SBTT Sector Avg.

DIV

IDEN

D Y

IELD

P/E

RA

TIO

Banking Sector Metrics

Trailing P/E Trailing Div Yield

Valuation Report

12


2.1

0.2

3.42.4

0.9 1.12.0

-1.0

1.8

-6.5

-1.9

1.9

2013 2014 2015 2016 2017 2018

Financial and insurance activities GDP

According to data from the CBTT, financial and insurance services contributed approximately 8%

to the Trinidad and Tobago economy in 2018. The data also shows that over the past 6 years the

financial sector has outpaced economic expansion. The financial sector grew at an annualized rate

of 1.7%, while the Trinidad and Tobago economy contracted at an annualized rate of -0.6% over

that period. As shown by the graph below, even in years when the Trinidad and Tobago economy

declined, the financial sector showed resilience. In 2017, real GDP declined by -1.9%, while the

financial sector expanded by 0.9%. In 2016, growth in the economy was estimated at -6.5%,

however the financial sector expanded by 2.4%. The data shows that in recent times the financial

sector in Trinidad and Tobago has become very robust; as even in a recession the sector can realize

growth.

Valuing Financial Services Firms

Banks, and other financial service firms pose particular challenges for an analyst attempting to

value them for two reasons. The first is that the nature of their businesses makes it difficult to

define both debt and reinvestment, making the estimation of cash flows difficult. The other is that

they tend to be heavily regulated, and the effects of regulatory requirements on value have to be

considered.

Defining debt - With a financial service firm, debt takes on a different connotation. Rather than

view debt as a source of capital, most financial service firms view it as a raw material. In other

words, debt to a bank is akin to steel for an automobile company, something to be molded into

other financial products that can then be sold at a higher price and yield a profit. Consequently,

capital at financial service firms is more narrowly defined as including only equity capital. This

definition of capital is reinforced by the regulatory authorities who count only equity or equity-

like financing in regulatory capital.

Valuation Report

Source: CBTT, JMMB

13


Regulation - Financial service firms are heavily regulated all over the world, though the extent of

the regulation varies from country to country. In general, these regulations take three forms. First,

banks are required to maintain capital ratios to ensure that they do not expand beyond their means

and put their depositors at risk. Second, financial service firms are often constrained in terms of

where they can invest their funds. Third, entry of new firms into the business is often restricted by

the regulatory authorities, as are mergers between existing firms. From a valuation perspective,

assumptions about growth are linked to assumptions about reinvestment. With financial service

firms, these assumptions have to be scrutinized to ensure that they pass regulatory constraints.

There might also be implications for how we measure risk at financial service firms. If regulatory

restrictions are changing or are expected to change, it adds a layer of uncertainty to the future,

which can have an effect on value.

Reinvestment – Measuring net capital expenditures and working capital at a financial service firm

can be problematic. Consider net capital expenditures first. Unlike manufacturing firms that invest

in plant, equipment, and other fixed assets, financial service firms invest in intangible assets such

as brand name and human capital. Consequently, their investments for future growth often are

categorized as operating expenses in accounting statements. Not surprisingly, the statement of cash

flows to a bank show little or no capital expenditures and correspondingly low depreciation. With

working capital, we run into a different problem. If we define working capital as the difference

between current assets and current liabilities, a large proportion of a bank's balance sheet would

fall into one or the other of these categories. Changes in this number can be both large and volatile

and may have no relationship to reinvestment for future growth.

As a result of this difficulty in measuring reinvestment, we run into two practical problems in

valuing these firms. The first is that we cannot estimate cash flows without estimating

reinvestment. In other words, if we cannot identify net capital expenditures and changes in working

capital, we cannot estimate cash flows, either. The second is that estimating expected future growth

becomes more difficult if the reinvestment rate cannot be measured.

Overcoming valuation Issues

Because of the uniqueness of financial services firms, it makes far more sense to value equity

directly at financial service firms, rather than the entire firm. Second, we either need a measure of

cash flow that does not require us to estimate reinvestment needs or need to redefine reinvestment

to make it more meaningful for a financial service firm. To overcome these issues, the Dividend

Discount Model (DDM), Simple Price to Book (P/B) and Simple Price to Earnings (P/E) valuation

methods were used. DDM implicitly assumes reinvestment through estimates of the retention ratio

rather than estimating CAPEX and working capital cash flows.

Valuation Report

14


Quantitative Valuation

Dividend Discount Model

Growth Phase Transition Phase Stable Phase

2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

Exp. g 14.15% 14.15% 14.15% 14.15% 14.15% 12.24% 10.33% 8.41% 6.50% 4.59% 4.59%

EPS $11.00 $12.56 $14.34 $16.37 $18.68 $20.97 $23.14 $25.08 $26.71 $27.94 $29.22

PO Ratio 0.54 0.54 0.54 0.54 0.54 0.55 0.56 0.58 0.59 0.60 0.60

DPS $5.95 $6.79 $7.75 $8.85 $10.10 $11.59 $13.06 $14.45 $15.71 $16.76 $17.53

Ke 13.33% 13.33% 13.33% 13.33% 13.33% 12.94% 12.56% 12.17% 11.79% 11.40% 11.40%

PV 5.09 5.12 5.16 5.20 5.24 5.41 5.54 5.60 5.60 5.54

Fair V $131.03 Undervalued - $(9.18)

Simple P/E 2012 2013 2014 2015 2016 2017 2018 Forecast

Historical P/E 14.51 15.33 16.39 15.16 18.77 13.15 12.71

Price/ Implied 2019 134.56

Earnings per share 7.27 7.18 7.42 7.39 5.86 7.74 8.16 8.83

Current Market Price 121.68

Over (undervalued)

$(12.71)

Simple P/B 2012 2013 2014 2015 2016 2017 2018 Forecast

Historical P/B 2.00 2.08 2.25 1.93 1.87 1.63 1.67

Price/ Implied 2019 $ 125.75

BV per share 52.88 52.86 54.10 58.09 58.82 62.46 62.13 67.24

Current Market Price 121.85

Over (undervalued)

$(3.90)

Valuation Report

15


8.23%

6.34% 5.72%

2.67%

6.01% 6.12% 5.83% 6.43%

2019 -Trail.

2018 2017 2016 2015 2014 2013 2012

0

5

10

15

2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

EPS VS. DPS

DPS EPS

Quantitative Valuation – DDM Insights

Our three stage DDM assumes RFHL will be able to maintain its 2019 payout ratio and grow its

EPS (and hence dividends) at the firm’s current fundamental growth rate for the next 5 years then

transition to the implied payout ratio given a stable growth assumption over the following 5 years.

Over the last 12 years RFHL has increased its DPS by 28%, from $3.15 in 2008 to $4.40 in 2019.

For that period EPS increased by 35%, from $7.15 in 2008 to $9.64 trailing EPS in 2019. In the

short-term, declines in EPS do not seem to have much effect on the level of DPS. In 2009 and

2016 EPS fell by 17.3% and 22.7% respectively, but in both years DPS increased. This indicates

that the DDM is a suitable method for valuing RFHL as stable dividends is the basis for using this

model. The smoothing of dividend payments over time usually indicates management is confident

concerning future earnings.

Our sustainable growth assumption for the high growth phase seems reasonable given the

trajectory of growth since 2016 and RFHL’s aggressive approach to expanding through

acquisitions. Growth will eventually slow when the firm concludes its’ aggressive expansion

throughout the Caribbean.

Valuation Report

Trailing 12M

16


This valuation is dependent on RFHL completing its planned acquisitions of Scotiabank in the

eastern Caribbean, economic expansion in Guyana and other expansions throughout the region in

the next five years.

Quantitative valuation – Simple P/E Insights

This model is a simple yet powerful measure of value that relies on historical market sentiment of

the growth prospects of the stock. It uses the market implied multiple for RFHL for the past 5 years

and forecasts the firm’s EPS to arrive at the firms ‘fair value’. The analysis shows that RFHL is

undervalued by $12.71.

Quantitative Valuation - Simple P/B Insights

Simple P/B multiple, has a similar methodology to the simple P/E. It uses the average P/B multiple

for the past 5 years then determines a fair value by projecting book value per share (BVPS). The

forecasted BVPS is simply beginning BVPS increased by the firms’ current fundamental growth

rate; so it implicitly assumes the same retention ratio. The analysis shows that the stock is

undervalued by $3.90.

RFHL Risk Factors

Macro-environmental factors - As with all firms RFHL is exposed to various risk factors

from the external environment. Although data shows that the financial sector in Trinidad is

more resilient during economic downturns than other sectors, investors must still be mindful

of the risk associated with increased delinquency caused by deteriorating economic conditions.

This could put a major strain of RFHL’s main income driver (interest from loans). Delinquency

could be caused by increased unemployment levels, decline in disposable income and increases

in cost of living of the citizens in the territories which RFHL operates. Interest rate risk is

always significant when discussing financial institutions as their revenue is heavily dependent

on where interest rates are.

Regulation – Regulation has already begun to affect RFHL negatively through the denial by

the Central Bank of Guyana of their proposed purchase of Scotiabank’s assets in Guyana. The

Government of Antigua and Barbuda is also attempting to block the proposed purchase of

Scotiabank’s assets in Antigua by RFHL. Both purchases have been met with claims of

concentration issues. As RFHL continues to expand throughout the region they may be met

with resistance as regulators are usually skeptical about Financial institutions becoming too

dominant in a market.

Peer to peer lending (P2P) – P2P is the practice of lending money to individuals or businesses

through online services that match lenders with borrowers. P2P companies often offer their

services online, and attempt to operate with lower overhead and provide their services for less

than traditional financial institutions. If this type of funding becomes popular in the region it

may eat into RFHL’s bottom line.

Valuation Report

17


Limitations of Analysis

Model Errors - DDM, P/B and P/E models are created in excel with most room for model

error in the DDM model.

Analyst expertise - The analyst has not been following the sector for an extended period of

time which limits insights in forecasting future growth in the absence of management

projections.

Recommendation

Our models give a range of values from $125.75 to $134.56, each with its own margin of error.

The DDM model is weighted at 50% while the Simple P/E valuation and the Simple P/B valuation

are weighted at 25% each. This is because we see the DDM as the most suitable model, given that

investors in Trinidad and Tobago tend to see more value in dividend stocks. A 3% margin of error

was applied to the weighted price to give a fair value range of $126.68 - $134.51. This is compared

to the current market price of $121.85. We recommend RFHL with an OVERWEIGHT rating.

This OVERWEIGHT rating is given on the following basis:

RFHL’s core revenue continues to grow on a consistent basis and we project that this pace

of growth will continue into the medium term.

RFHL continues to diversify its revenue streams with an aggressive acquisition strategy.

As earnings continue to grow RFHL will continue rewarding shareholders with healthy

dividend payments.

RFHL’s low cost of funds give it a significant advantage over its’ competitors. They will

be able to keep and grow their market share by offering superior priced products.

RFHL keeps investing in technology to become more efficient (implementation of a

common IT platform across all of its Caribbean subsidiaries) and providing innovative

products to their customers (card-less cash etc.).

RFHL is also expected to benefit from increased business in Guyana as that territory is

projected to experience significant economic growth due to oil and gas discoveries.

Fair Value Range Price Weight

DDM $ 131.03 50%

Simple PE Val $ 134.56 25%

Simple PB Val $ 125.75 25%

Weighted Price $ 130.59

3% Under $ 126.68

3% Over $ 134.51

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APPENDIX

IMPORTANT DISCLOSURES

Abstract— as a part of our new portfolio strategy we are recommending strict adherence to the

following portfolio allocation definitions/recommendations.

PLEASE NOTE THAT NO INDIVIDUAL ASSET IN YOUR PORTFOLIO SHOULD HAVE

A WEIGHTING GREATER THAN 10% UNLESS OTHERWISE RECOMMENDED BY YOUR

PORTFOLIO MANAGER/ INVESTMENT ADVISOR OR A SPECIFIC JMMB RESEARCH

REPORT. CONSEQUENTLY, THE FOLLOWING DEFINITIONS ARE PROVIDED FOR

CLARITY.

HOLD/MARKETWEIGHT— This rating is based on a flat capital appreciation (0% to 3%) of

a stock relative to the current market price.

BUY/OVERWEIGHT— This rating is based on the capital appreciation of a stock above 3% of

the current market price.

UNDERWEIGHT— This rating is based on the negative price movement of a stock (less than

0%) relative to the current market price.

COPYRIGHT INFRINGEMENT

“Unless otherwise expressly stated, copyright or similar rights in all material in this research report

(including graphical images) is owned, controlled or licensed by Jamaica Money Market Brokers

Limited or its affiliates (JMMB) and is protected or covered by copyright, trade mark, intellectual

property law and other proprietary rights. No part of this research report or the report in its entirety

may be published, used, reproduced, distributed, displayed or copied for public or private use in

any form including by any mechanical, photographic or electronic process (electronically, digitally

on the Internet or World Wide Web, or over any network, or local area network or otherwise)

without written permission from JMMB.

No part of this research report may be modified or changed or exploited or used in any way for

derivative works, or offered for sale, or used to construct any kind of database or mirrored at any

other location without the express written permission of JMMB.

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Thank you for respecting our intellectual property rights.”

The investments referred to in this report may not be suitable for you should consult your licensed

investment advisor. Nothing in this report constitutes investment, legal, accounting or tax advice

or a representation that any investment or strategy is suitable to your individual circumstances or

otherwise constitutes a personal recommendation to you.

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