Fellow Finance - Interesting times ahead

Signed combination agreement to create “Fellow Bank”
Fellow Finance and Evli Bank signed a combination agreement, by which Evli Bank will demerge through a partial demerger and Fellow Finance will merge with the company that will carry on Evli Bank’s banking services and form “Fellow Bank”. A main idea behind the merger is to combine Evli’s banking and risk management expertise with Fellow Finance’s expertise in lending and assessment of creditworthiness. The combination would in our view create clear synergies and provide a sturdier foundation but with the shift to balance-sheet lending Fellow Finance’s original idea of a scalable lending platform would be less valid. The arrangement is intended to be carried out during the first half of 2022.

Good loan volume growth during H1
H1 has seen loan volumes rebound quite nicely, with the monthly average during H1 at around EUR 15m compared with EUR 11m during H2/20, and most recent months nearing all-time high. We have raised our 2021 estimate to EUR 201m (prev. EUR 160m). The growth should not translate as well into revenue given the growth being driven by lower-margin business lending, but we still expect growth of 18.6% from the weak comparison period. The business lending driven growth should also not burden costs as much, but earnings are still expected to remain low due to growth investments.

BUY with a target price of EUR 4.0 (3.8)
The combination agreement could value Fellow Bank at EUR 50.8m (FF 25.2m, Evli banking serv. 13.9m and 11.7m added capital through share issue), and with at least EUR 30m equity would give a max 1.7x P/B. We will treat Fellow Finance as is for now. On our revised estimates we raise our target price to EUR 4.0 (3.8) and retain our BUY-rating.