As per reports, Infosys Ltd (INFO IN) may consider a proposal for a share buyback of $1.60 billion very soon. The buyback announcement is likely to be made on January 11 when the company board meets to consider the 3Q FY19 results. Before this, in November 2017, Infosys Ltd (INFO IN) had announced a buyback and spent Rs130 bn to buy a total of 113mn equity shares. This fresh buyback could be an important development and could be an important support for the stock, it is also sensible for other reasons.
There are no major acquisitions in recent times by Infosys Ltd (INFO IN) and if this is likely to be the trend for near future, share buyback is not a bad idea. The company is still struggling with some of the legacy issues and the priority as of now is to streamline the organic growth. We think Infosys Ltd (INFO IN) is also cautious with inorganic growth opportunities as the company had serious issues with acquisitions in the past. What could be another key driver behind this is that in valuation terms, Infosys Ltd (INFO IN) is not very expensive.
During the second half of December 2018, Japan saw two telecom companies list on the Tokyo Stock Exchange: Softbank Corp (9434 JP) and ARTERIA Networks (4423 JP). After years of industry consolidation, which saw several stocks delist, this felt like a Christmas miracle (at least for those watching the sector’s stocks).
It would be hard to find two companies in the same industry that are so different – both in their business models as well as in how their IPOs were positioned to investors. One stock is 100 times larger than the other, but this is not a story of David and Goliath. It is two unique stories in parallel.
While each company took a very different approach to selling its stock, both have suffered from the subsequent broader market weakness, irrespective of company specifics. We can’t say it has been the worst of times, but it certainly has been a tough time with SoftBank Corp down 13% and Arteria down 20% from their IPO prices.
In this Insight we explore how each company approached its IPO and how each has fared since.
Good payout ratio, good growth in core profit, and strong long-term sales growth relative to its sector
Acquisition of 49% stake in a 30MW solar farm in Malaysia with a commercial operation date (COD) set for 1Q20 to support revenue growth
High volume of solar rooftop installation projects planned for Charoen Pokphand Foods Pub (CPF TB) and other private firms to boost GUNKUL’s construction revenue
Attractive at 19CE* PEG ratio of 0.5 relative to ASEAN Industry at 1.6
Risk: Lower than expected electricity demand, unfavorable weather conditions
We maintain a BUY rating on ASAP with new 2019E target price of Bt3.80 (from Bt6.50), derived from 19.6xPE, which is 1.0x PEG of earnings growth in 2019-20E.
The story:
Trimmed 2018-20F earnings forecast by 35%
Not a falling knife, but fallen angel
Potential disruptor in car rental industry
Expect a 20% CAGR for earnings in 2019-20E
Risks:
Contract termination of airport space leases
Participating in a highly competitive industry
Cash-flow management will be a challenge in a growth phase
Maruti Suzuki’s Q2FY19 results were below our expectations. Sales grew by only 2% YoY in Q2FY19 led by a 3.7% increase in realization per unit. But the volumes declined by 1.5% YoY in the same period. We analyze the results.
Low correlation to the Thai market, low correlation with Western stock markets, and cheap on a PE basis relative to its sector
Stable cash flow from new contract for FGEN’s San Gabriel plant to sell its entire capacity of 414 MW to Meralco Manila Electric Company (MER PM) until 2024
Geothermal-energy producer EDC has been delisted through a share buyback tender offer, FGEN to benefit from higher equity stake (47% vs 42%) and more control over the firm to implement longer-term strategies
Trades at discount to ASEAN Utilities at 19CE* 6.5x PE and offers much better EPS growth
Risks: Facility breakdowns, uncertainty regarding plans for LNG facility
Tracking Traffic/Containers & Air Cargo is the hub for all of our research on container shipping and air cargo, featuring analysis of monthly industry data, notes from our conversations with industry participants, and links to recent company and thematic pieces.
Tracking Traffic/Containers & Air Cargo aims to highlight changes to existing trends, relationships, and views affecting the leading Asian companies in these two sectors. This month’s note includes data from about twenty different sources.
In this issue readers will find:
An analysis of November container shipping rates, which our index suggests increased by over 20% Y/Y. We concede that our index skews toward volatile spot rates rather than contract rates, but we suspect higher average container rates in Q418, combined with moderating fuel prices, will result in surprisingly strong earnings for the quarter.
A look at November air cargo activity and air cargo pricing, which diverged. The volume of air cargo handled by the five airlines we track declined slightly (-0.1% Y/Y) but some of those carriers reported sharply higher yields (circa +10% Y/Y), due to limited capacity expansion in the region.
Some good news: fuel prices have continued to moderate. Bunker climbed by just 5.1% Y/Y as of mid-December, and jet fuel prices have fallen about 11% Y/Y. Given firm container rates and air cargo pricing, the drop in fuel prices bodes well for Q418 margins, though it’s unclear whether such gains are sustainable.
Although slowing demand growth is unlikely to generate impressive top-line improvements, firmer pricing combined with lower fuel costs should support an ongoing improvement in profitability for container carriers and air cargo operations in the near-term. We believe many investors remain too pessimistic regarding near-term earnings for container carriers and airlines.
Lic Housing Finance (LICHF IN), founded by Life Insurance Corporation of India, is the 2nd largest Housing Finance Company (HFC) in India with a total outstanding loan book portfolio of Rs 1,759 bn as of 2QFY19. 94% of the company’s loans were to retail customers as home loans & Loan Against Properties (LAP) and the balance 6% were to project developers as of 2QFY19.
We like the business of LICHF for following reasons:
LICHF focuses on the salaried segment. 86% of the customers as of 2QFY19 were from the salaried class. This provides the company with stability in earnings and better asset quality. We expect the NIMs & Spreads to be stable at 2.4% & 1.2% respectively for the period of FY18-21E.
We expect LICHF’s total loan book to grow at a CAGR of 16% over the period of FY18-21E. This growth will be supported by LAP and Developer loans. We expect the retail home loan portfolio to grow at a CAGR of 11% over the same period.
As the company focuses on LAP & developer segment to grow the total loan book, we expect this to affect the asset quality adversely. We expect the Gross Non-Performing Assets (GNPA) & Net Non-Performing Assets (NNPA) to increase to 1.3% (from 1.2% as of Sept-18) & 0.5% (from 0.4% as of Sept-18) respectively.
We initiate coverage on LICHF with a fair value estimate of Rs 570/- over the next 12 months. This implies a potential upside of 19% from the closing market price of Rs 481 as on 20th December 2018. This is arrived by applying P/ABV (Price to Adjusted Book Value) multiple of 1.7X to our Adjusted Book Value Estimate of Rs 337 per share for the period ending Sept-20E.
Particulars
FY18
FY19E
FY20E
FY21E
P/ABV (X)
2.1
1.7
1.5
1.3
ROE (%)
17.3
15.5
14.5
15.1
ROA (%)
1.3
1.2
1.2
1.2
Source: Trivikram Consultants Research as of 20th December 2018
Improving asset turnover, good risk adjusted price momentum, and relatively strong analyst recommendations relative to its sector
Larger distribution channel through acquisition of DNA Retail Link to add 95 more stores to current 518 stores
New mobile product launches in 4Q18 and COM7’s focus on high margin products, such as Android smartphones, should support high earnings growth which was up 56% YoY in 3Q18
Attractive at a 19CE* PEG of 0.9 versus ASEAN sector at a PEG of 2.7
Risks: Lower-than-expected demand for new IT products, slower-than-expected store expansions
Tracking Traffic/Chinese Express & Logistics is the hub for our research on China’s express parcels and logistics sectors. Tracking Traffic/Chinese Express & Logistics features analysis of monthly Chinese express and logistics data, notes from our conversations with industry players, and links to company and thematic notes.
This month’s issue covers the following topics:
November express parcel pricing remained weak. Average pricing per express parcel fell by 7.8% Y/Y to just 11.06 RMB per piece. November’s average price represents a new all-time low for the industry, and November’s Y/Y decline was the steepest monthly decline in over two years (excluding Lunar New Year months, which tend to be distorted by the timing of the holiday).
Express parcel revenue growth dipped below 15% last month. Weak per-parcel pricing pulled express sector Y/Y revenue growth down to just 14.6% in November, the worst on record (again excluding distorted Lunar New Year comparisons). Chinese e-commerce demand has slowed and we suspect ‘O2O’ initiatives, under which online purchases are fulfilled via local stores, are also undermining express demand growth.
Intra-city pricing (ie, local delivery) remains firm relative to inter-city. Relative to weak inter-city express pricing (where ZTO Express (ZTO US) and the other listed express companies compete), pricing for local, intra-city express deliveries remained firm. In the first 11 months of 2018, express pricing rose 1.7% Y/Y versus a -2.9% decline in inter-city shipments (international pricing fell sharply, -14.5% Y/Y). Relatively firm pricing on local shipments may make it hard for local food delivery companies like Meituan Dianping (3690 HK) and Alibaba Group Holding (BABA US) ‘s ele.me to beat down unit operating costs.
Underlying domestic transport demand held up well again in November. Although demand for speedy, relatively expensive express service (and air freight) appears to be moderating, demand for rail and highway freight transport has held up well. The relative strength of rail and water transport (slow, cheap, industry-facing) versus express and air freight (fast, expensive, consumer-oriented) suggests a couple of things: a) upstream industrial activity is stronger than downstream retail activity and b) the people in charge of paying freight are shifting to cheaper modes of transport when possible.
We retain a negative view of China’s express industry’s fundamentals: demand growth is slowing and pricing appears to be falling faster than costs can be cut. Overall domestic transportation demand, however, remains solid and shows no signs of slowing.
While Nissen and Senshukai (8165 JP) have hit new lows in the past five years, Belluna (9997 JP) has gone from strength to strength by sticking with printed catalogues and tying these to e-commerce and retail store expansion.
The company’s strategy is also helped by the core customer demographic being women over the age of 50, one of the few population segments that is still growing.
As a result, group sales have risen by 28.8% in five years and operating profit has almost doubled from ¥7.8 billion to ¥13 billion.
The acquisition of Sagami, a kimono retailer that suffered from lack of attention under Uny’s management, could also result in a boost to profits in the next year.
Softbank Group (9984 JP)’s market cap has consistently traded below its NAV. A popular expectation was that the Softbank Corp (9434 JP) IPO should be a catalyst to narrow the conglomerate discount (holdco discount). On its trading debut today, SoftBank Corp’s shares fell 14.5% from its IPO price of JPY1,500 to JPY1,282 per share – the worst first-day decline ever for a major IPO in Japan since the Japan Display (6740 JP) IPO in 2014.
In our previous research, we stated that the SoftBank Corp IPO is unlikely to meaningfully narrow SoftBank’s holdco discount. Our updated SoftBank SoTP analysis which reflects SoftBank Corp’s trading debut suggests that SoftBank’s holdco discount has not meaningfully narrowed.
Current price offers a good entry point, relatively strong analyst recommendation, and low earnings expectation relative to its sector
Successful execution of Indonesia’s biodiesel mandate should drive CPO demand for biodiesel blending, hence driving CPO prices
Through strong partnerships with smaller estates AALI can increase external FFB (fresh fruit bunch) purchases, reducing fixed costs incurred by plantation
Attractive at 19CE* 10% ROE/PB compared to ASEAN Consumer staples at 4.6% and AALI offers 4% dividend yield
Risks: Low palm-based commodities and crude palm oil prices
This is something you really don’t see often, a sharp and positive stock price movement in Govt owned Indian power utilities. But after the latest draft regulation on the tariff norms for 2019-24 from CERC (the Central Electricity Regulatory Commission, which is the highest regulatory body for power sector in India) was released on 14th of December, both NTPC Ltd (NTPC IN) and Power Grid Corporation Of India (PWGR IN) have done well in absolute terms and also outperformed the broader markets. After CERC suggested continuation of the 15.5% regulated return on equity (RoE) for the power generation and transmission companies, this was seen as a positive regulatory development and helped these stocks.
However, investors should also look at the risks before getting too optimistic on Govt owned Regulated Power Utilities, a) these are not final norms and CERC has invited comments from the stakeholders and Regulator may still tweak the tariff norms for period starting 1st April 2019 depending on feedback and inputs from DISCOMs and consumer groups, b) Usually, the political rivalry between Centre and States doesn’t affect the PSUs but as some of recent developments such as Odisha where the state blamed Centre for increased tariff burden suggest, this is changing and could be damaging for future long term contracts of NTPC Ltd (NTPC IN) and Power Grid Corporation Of India Limited (PWGR IN).
There are question marks on future growth for both these companies. While NTPC Ltd (NTPC IN) will have to compete with renewable sources, there is a risk that capex growth will slow down for Power Grid Corporation Of India Limited (PWGR IN) as well. While latest draft regulation has come as positive, we don’t expect sustained stock price outperformance from NTPC Ltd (NTPC IN) and Power Grid Corporation Of India Limited (PWGR IN) as there are structural challenges for them and a Govt ownership and its impact on strategic decision making continues to remain an overhang.
We believe that TME is fairly valued based on peer companies’ price / sales ratios.
The Chinese internet peer companies as comparison bases in valuation have declined significantly more than indices, we believe it is not a concern that indices declined further.
We believe that the main business of music will grow strongly in 2019 and 2020 due to the rapid growth of both the paying user base and ARPU (Average Revenues per User per month).
Elastic NV (ESTC US) has been one of the best tech IPOs globally in 2018. Its current price is $62.53, up 74% from its IPO price of $36. Elastic’s share price has been holding up very nicely since its IPO on October 5th, 2018. Meanwhile, from October 5th to December 21st 2018, many tech stocks have experienced brutal declines. Elastic’s ability to outperform the top US tech stocks in a very difficult environment for the stock market sets the stage for a continued out-performance once the stock market starts to stabilize.
Since the IPO, the company reported better than expected second quarter results (quarter ending October 31, 2018) on December 4th. The company’s adjusted net loss in FY2Q19 was $0.38 per share, beating analysts’ consensus estimate by 9 cents. It generated revenue of $63.6 million, up 72% YoY. Calculated billings were also strong at $88.5 million, up 73% YoY.
The company’s guidance for FY3Q19 (quarter ending January 31, 2019) is to generate revenue in the range of $64 million to $66 million, representing a 56% YoY growth rate at the midpoint of the guidance. It expects to generate operating margin of negative 28% to negative 30% in FY3Q19.
A combination of major investors shifting their assets away from FAANG and semiconductor stocks has resulted in some improved performance of many software related stocks in recent months relative to other major tech stocks. In general, these stocks face less negative impact from a prolonged trade war between China and the US. Plus, theyare not as exposed to the higher cycle volatility as the semiconductor related stocks. In many respects, Elastic shares many business similarities with these software driven companies, and thus has been more immune from the decline in the stock prices since early October. We remain positive on Elastic NV (ESTC US).
Horiba combines high gearing to semiconductor capital spending with a large and growing automotive test business characterized by upward trending but uneven profitability. At ¥4,545 (Friday, December 21, closing price), its share price has dropped by 53% from an all-time high of ¥9,590 reached last May. Falling demand for semiconductor production equipment and a downward revision to FY Dec-18 sales and profit guidance announced in November appear to be largely in the price.
The downward revision, which cut projected full-year operating profit growth from 15.5% to 2.5%, followed a 22.2% year-on-year decline in operating profit in 3Q and implies a similar rate of decline in 4Q. The weakness is concentrated in Semiconductor Equipment and Automotive Test, the former due to a cyclical downturn in overall demand, the latter due to M&A-related and other one-time expenses. New Automotive Test orders continued to outpace sales, leading to a 9.5% increase in the order backlog during 3Q.
Automotive Test sales and profits should rise next year, while semiconductor equipment sales and profits seem likely to bottom out. In a report issued on December 17, SEMI (the semiconductor equipment and materials industry organization) forecasts a further decline in wafer fab equipment sales in 1H of 2019, followed by recovery in 2H. Other industry sources we talked to before the report was issued had similar views.
This scenario could fall apart due to general economic weakness, American attempts to stifle China’s semiconductor industry, or both. On December 21, Reuters reported that Foxconn “…is in the final stages of talks with the local government of the Chinese city of Zhuhai to build a chip plant there with a total investment of about $9 billion… most of which would be shouldered by the Zhuhai government through subsidies and tax breaks…” This looks like a perfect target for the Americans, but whether or not they will notice or care remains to be seen.
Horiba is now selling at 9.6x our EPS estimate for this fiscal year, 13.4x our estimate for next year and 12.1x our estimate for FY Dec-20. These and other projected valuations are near the bottom of their 5-year historical ranges. If the Semiconductor Equipment division does not recover in 2H of 2019, historical data suggest that its operating profit could drop by 70% rather than the 47% we are now forecasting, resulting in a P/E ratio of 17x. Nevertheless, it is time to start considering when and at what price to buy Horiba.
Horiba is a diversified Japanese maker of precision and analytical devices and systems with a significant presence in the global markets for automotive test, industrial process and environmental analysis, hematology, semiconductor production equipment and scientific instruments. It is by far the world’s leading producer of automotive emission measurement systems (EMS), having supplied about 80% of the installed base worldwide, and also the world’s top manufacturer of mass flow controllers for the semiconductor industry, with an estimated global market share of nearly 60%.
FBN Holdings Plc (FBNH NL) is the oldest and second-largest bank in Nigeria with a market share of 14% of domestic loans.
FBN’s solid franchise provides robust revenue generation capacity (especially in e-business and insurance) plus a solid and cheap funding base complemented by a strong liquidity profile. The Group’s solid funding base of low cost retail deposits, mainly CASA, underpins one of the most competitive in the sector.
Under new management, FBN is focused on a legacy asset quality clean-up and enhancing risk controls. The franchise has exhibited resilience in the face of system-wide asset quality problems, related to some extent to the concentration of oil/gas exposures. Moving forward, profitability can strengthen with improving asset quality though the recent plunge in oil prices represents a threat to this de-risking process. A plus point is the vibrant income streams from e-business and insurance growth drivers.
The operating environment in Nigerian remains challenging: while the country has emerged from a recession, vulnerabilities remain. Lower oil prices, tighter external market conditions, heightened security issues, and delayed policy responses are the main downside risks. The recent fall in oil prices is a concern given Nigeria’s dependency on the commodity and its knock-on effect to the hydrocarbon-exposed Banking System. Although access to foreign currency has eased, due to FX reforms, many borrowers retain limited capacity to service obligations and there are modest opportunities for banks to grow their loan portfolios.
FBN is thus somewhat of a contrarian call given the weakness in the oil market. But one should buy a hydrocarbon “play” when prices are low, not high. Shares trade at a 60% discount to Book Value and stand on a low Mkt Cap./Deposits rating of 8%, far below the global and EM median. FBN commands a dividend-adjusted PEG of 1.3x. Dividend and earnings yields are 3.3% and 15%, respectively. A quintile 1 PH Score™ of 7.7 captures the valuation dynamic while metric change is satisfactory. Combining franchise valuation and PH Score™, FBN stands in the top quintile of opportunity globally. The asset quality position and interrelated lower profitability vis-a-vis peers is a reason behind FBN’s lower credit rating and relatively low valuation. We are somewhat sceptical that FBN’s underlying creditworthiness and valuation are efficiently evaluated versus more popular counterparts.
Strong net profit momentum and more attractive to analysts relative to its sector
Higher power demand trend from new industrial consumers should continue supporting electricity sales, revenue rose 31% YoY in 3Q18
Large capacity expansion from Xayaburi hydroelectric power plant in Laos with expected commercial operation date (COD) in 4Q19 to more than double CKP’s current effective capacity
Trades above ASEAN Utilities at 19CE* 45.1x PE but offers great EPS growth in a sector that is expected to remain flattish
Risk: Delays for new plants, change in government regulation
During this quarter, we visited 13 companies and have to admit the average quality has improved. Amongst these, there were four stocks that impressed us the most, and the Oscars go to…
SSP acheiving profit growth in excess of 20% in the backdrop of Thai economic headwinds and Trumpian trade wars by expanding into countries unaffected by both issues.
Amata VN capitalizing on the shift from locations with rising labor costs (eg Thailand, China) to Vietnam, which has more than a few geographic and demographic advantages.
Gunkul, arguably Thailand’s hottest renewable play at the moment delivering outsized long-term growth in solar/wind space as well as a promising solar roof game plan.
TIGER, an aggressive and small construction company that has only IPO’d for less than a quarter and is already highlighting aggressive growth plans.
The Islami Bank Bangladesh (ISLAMI BD) narrative is underpinned by a quintile 1 global PH Score™ and a lowly franchise valuation by global standards.
ISLAMIBANK is a Shariah-centric entity, basing its operations on partnership, profit-sharing, a principal-agent/ lessee-lessor relationship, and trading via traditional concepts of Murabaha, Mudaraba, Musharakah, Muajjal, Ijarah, Ujarah, and Wadiah. The bank’s asset-base is dominated by “investments” relating to Bai-Murabaha (asset financing with a mark-up) and hire purchase under Shirkatul Melk with modest exposure to Bai-Muajjal, Quard, Bai-Salam, Mudaraba and Musharaka. More than 50% of “Investments” relate to the industrial space, in particular to textiles (spinning/weaving/dyeing), to agriculture, to garments and accessories, and to steel (re-rolling and engineering). About 90% of “investments” stem from urban areas. There is a focus on Dhaka and Ctittagong opportunity. Source of Funding is based on Mudarabah.
While the economy is in a relatively stable state, the Banking Sector presents a highly mixed picture. Funding and liquidity are adequate in the Banking System. At the main listed entities, ROA and ROE stand at around 1% and 12%. Capitalisation targets are moving in the right direction though there is a shortfall at a number of lenders. The sector is weighed down by SOCB asset quality and poor governance which needs to be addressed as it exerts a distortionary impact across the system. SOCB NPL ratio stands at around 30% and is probably worse than this versus around 10% for the system in general. The system stressed loan/investment ratio is probably double this level. Worryingly, private sector bank defaults are rising at a fast clip too.
Shares of ISLAMIBANK stand on an Earnings Yield of 13.5%, a P/B of 0.7x, and a FV at 5%, well below EM and global medians. Shares yield 4.3%. A quintile 1 PH Score™ of 8.2 captures value-quality attributes. Combining franchise valuation and PH Score™, ISLAMIBANK stands in the top decile of opportunity globally. Shares seem to discount any good news.
Bank St Petersburg PJSC (BSPB RM) benefits from an entrenched market position and strong brand recognition in its home market of City of St. Petersburg –represented by sectors such as pharmaceuticals, medical materials, motor vehicles, trailers/semi-trailers, food products, textiles, and rubber /plastic goods- as well as Kaliningrad and Leningrad.
BSPB’s asset base is a quite diversified. While management focuses on relatively low-risk and hence low-yielding loans to core large corporates and mortgages, the consumer credit segment and autos are a fast-growing area.
Top Russian banks tend to have a technological edge vis-a-vis other EMs. BSPB‘s Internet Bank ( i.bspb.ru) remains one of the best in Russia exhibiting a 25% growth in retail customers to 960k last year. A recent innovation was the launch of a mobile website which was created as part of the integrated environment based on BSPB Mobile banking apps for iOS, Android, and WindowsMobile . The e-banking system is currently used by more than 95% of the corporate customers of BSPB with 99% of payments and FX transactions being made online. BSPB cards support all the cutting-edge mobile payment technologies offered by Apple Pay, Samsung Pay and Android Pay.
A key of BSPB’s strategic plan is to achieve a sustained ROAE of 15%+. The bank also vows to remain among the top 20 Russian banks by assets and to increase transaction revenues by 50% over 2018-20. In order to achieve these goals, management is committed to expand the low-risk transaction business and bolster corporate lending by introducing industry expertise and specialisation and a segmental approach matching customer demand with high quality services and products.
Independent directors make up at least 1/3 of the Supervisory Board.
BSPB stands out trading at a 70% discount to Book Value and lies on a low Mkt Cap./Deposits rating of 6%, far below the global and EM median. BSPB commands a huge dividend-adjusted PEG of 5x with expected growth more than 3x its PER. Shares yield 3.5%. A quintile 1 PH Score™ of 9.4 captures the valuation dynamic while metric change is satisfactory. Combining franchise valuation and PH Score™, BSPB stands in the top decile of opportunity globally.
Improving asset turnover, relatively strong analyst recommendations, and slow asset growth relative to its sector
New launches in FY2019-20 e.g. CX-3 facelift and 7-seat SUV CX-8 should stimulate sales going forward. Sales were up by 24% in 1QFY19 YoY
Equity income from JV with Mazda Motor (7261 JP) should increase as production volume ramps up to meet strong ASEAN demand. Production up by 40% YoY in FY2018
Attractive at a 19CE* 0.4 PEG ratio versus ASEAN Consumer Discretionary at a PEG of 0.9 and BAUTO is net cash
Risks: Regulations and sluggish consumer demand, FX risk JPY and PHP
Oil prices are now similar to where they were during 2017 when Singapore’s banks faced significant credit quality stresses. This was due to oil service sector lending, where bad loans here have generally not even declined. With a key driver of this sector distress in the past showing radical weakness yet again, the risk is resurgence in credit costs at Singapore banks during 4Q18. At the same time, global banks are telling a story. It is one not of a robust global economy, but one that is weakening. We have written at length about our concerns of rising rates due to policy rather than real demand, and it remains core to our global bank view. Perhaps Canada’s weak inflation rate – coming below target – is just another global example in addition to countries in Europe and UK, that underlying demand is simply not that robust?
On December 18th, the Korean government announced numerous measures to reduce fine dust levels, including a significant increase in the number of hydrogen powered vehicles, including expandinghydrogen vehicles to 65,000 units by 2022 (cumulative).
The Korean government wants to encourage the growth of hydrogen powered economy and position the country as one of the global leaders in this segment. The Korean government plans to spend about 3.5 trillion won to support the Korean auto industry. The Korean government’s new plan is to expand the hydrogen vehicles to 65,000 units by 2022, which is a big increase from the previous plan of expanding the hydrogen vehicles to 15,000 units by 2022.
The Hyundai Motor Group also recently announced a grand plan to expand its fuel cell vehicles with the announcement of its ‘FCEV Vision 2030.’ The Hyundai Motor Group plans to increase its annual production capacity for fuel cell systems to 0.7 million units by 2030, with plans to invest about $7 billion in the next 10 years to develop hydrogen fuel cell systems.
Small caps have an easier time scaling up in good times, but can get hit much harder by liquidity in the bear markets. Anyway, it’s still good to check how some of the better-know small cap names like MEGA and Eastwater even if they are not doing particularly well.
Here’s some highlights:
MEGA hasn’t done quite as well. Their earnings growth has slowed to under 10% this year despite an average of 19% between 2014 and 2017. It doesn’t seem like there’s anything wrong with the business model or even execution, just Law of Large Numbers and running out of near-term opportunities.
Interestingly, the company’s biggest market outside ASEAN is Africa (eg. Nigeria, Ethiopia), which accounts for 12% of their branded product revenues, and that’s declined 4.2%, hence dragging down the company’s performance.
East Water realized healthy and stable gross margin of 50% and ROE of 10.9% while maintaining a strong credit rating of A+, allowing them to finance aggressive capex cheaply.
The company generates over half of its revenues from raw water, which is more profitable than tap and industrial, and has had a recent change in strategic shareholder from EGCO to Manila Water.
SPH REIT is acquiring an 85% stake in Figtree Grove Shopping Centre in the inner western suburb of Wollongong, New South Wales, Australia for S$188.2 mn. Australia’s media has reported Blackstone as the property’s vendor. SPH REIT is jointly acquiring Figtree Grove with a publicly listed financial services group, Moelis Australia Limited, which will own the remaining 15% interest.
This acquisition is SPH REIT’s first overseas foray and is only the second acquisition deal since listing. Compared to its first acquisition of The Rail Mall, the acquisition of Figtree Grove is truly meaningful as it opens up the possibility of portfolio acquisitions from its newly established network of contacts.
While the addition of an Australian retail asset into SPH REIT’s portfolio enhances geographical diversification (5.2% of portfolio by asset value), investors should know that the e-commerce threat to retailers in Australia appears to be greater than in Singapore.
Estimates show that the acquisition of Figtree Grove is marginally DPU-accretive. I am maintaining my view on SPH REIT as a defensive investment to continue holding, noting the stable yield of 5.6% for FY19F-20F. Fair value is largely unchanged at S$1.09/unit (previous S$1.08/unit).
Event – Bristol Myers Squibb Co (BMY US)‘s French OTC business UPSA has been on the block since June 2018. According to a December 17, 2018 Bloomberg report (link), Taisho has emerged as the frontrunner to acquire UPSA for ~$1.6b
Our Take
If Taisho Pharmaceutical Holdin (4581 JP) indeed goes ahead, it would get access to UPSA’s established (matured) OTC business, which generated ~$480m in sales in FY17
UPSC’s key OTC brands include Aspirine, Dafalgan and Efferalgan pain relievers; Donormyl sleep aid; and Fervex cold and flu remedies
Taisho also gains a foothold in France, contributing ~60% of UPSA sales (the rest is from other EU countries and China), by leveraging UPSA’s production facilities and distribution channels to perhaps market some of its own OTC products
Valuation
Preliminary analysis suggests that the potential acquisition would have only a marginal impact on Taisho’s financials in the short to medium term due to:
Acquisition of a matured OTC portfolio that is projected to decline by 3-5% per year
Absence of cost synergies; Taisho’s SG&A expense to increase by ~¥12-15b from FY19e
Post deal Cash and Eq. of ~ $1b (assuming UPSA is an all cash deal)
Net, net we would maintain our EW rating and Fair Value estimate of ¥11,300 / share.
Tracking Traffic/Chinese Express & Logistics is the hub for our research on China’s express parcels and logistics sectors. Tracking Traffic/Chinese Express & Logistics features analysis of monthly Chinese express and logistics data, notes from our conversations with industry players, and links to company and thematic notes.
This month’s issue covers the following topics:
November express parcel pricing remained weak. Average pricing per express parcel fell by 7.8% Y/Y to just 11.06 RMB per piece. November’s average price represents a new all-time low for the industry, and November’s Y/Y decline was the steepest monthly decline in over two years (excluding Lunar New Year months, which tend to be distorted by the timing of the holiday).
Express parcel revenue growth dipped below 15% last month. Weak per-parcel pricing pulled express sector Y/Y revenue growth down to just 14.6% in November, the worst on record (again excluding distorted Lunar New Year comparisons). Chinese e-commerce demand has slowed and we suspect ‘O2O’ initiatives, under which online purchases are fulfilled via local stores, are also undermining express demand growth.
Intra-city pricing (ie, local delivery) remains firm relative to inter-city. Relative to weak inter-city express pricing (where ZTO Express (ZTO US) and the other listed express companies compete), pricing for local, intra-city express deliveries remained firm. In the first 11 months of 2018, express pricing rose 1.7% Y/Y versus a -2.9% decline in inter-city shipments (international pricing fell sharply, -14.5% Y/Y). Relatively firm pricing on local shipments may make it hard for local food delivery companies like Meituan Dianping (3690 HK) and Alibaba Group Holding (BABA US) ‘s ele.me to beat down unit operating costs.
Underlying domestic transport demand held up well again in November. Although demand for speedy, relatively expensive express service (and air freight) appears to be moderating, demand for rail and highway freight transport has held up well. The relative strength of rail and water transport (slow, cheap, industry-facing) versus express and air freight (fast, expensive, consumer-oriented) suggests a couple of things: a) upstream industrial activity is stronger than downstream retail activity and b) the people in charge of paying freight are shifting to cheaper modes of transport when possible.
We retain a negative view of China’s express industry’s fundamentals: demand growth is slowing and pricing appears to be falling faster than costs can be cut. Overall domestic transportation demand, however, remains solid and shows no signs of slowing.
Elastic NV (ESTC US) has been one of the best tech IPOs globally in 2018. Its current price is $62.53, up 74% from its IPO price of $36. Elastic’s share price has been holding up very nicely since its IPO on October 5th, 2018. Meanwhile, from October 5th to December 21st 2018, many tech stocks have experienced brutal declines. Elastic’s ability to outperform the top US tech stocks in a very difficult environment for the stock market sets the stage for a continued out-performance once the stock market starts to stabilize.
Since the IPO, the company reported better than expected second quarter results (quarter ending October 31, 2018) on December 4th. The company’s adjusted net loss in FY2Q19 was $0.38 per share, beating analysts’ consensus estimate by 9 cents. It generated revenue of $63.6 million, up 72% YoY. Calculated billings were also strong at $88.5 million, up 73% YoY.
The company’s guidance for FY3Q19 (quarter ending January 31, 2019) is to generate revenue in the range of $64 million to $66 million, representing a 56% YoY growth rate at the midpoint of the guidance. It expects to generate operating margin of negative 28% to negative 30% in FY3Q19.
A combination of major investors shifting their assets away from FAANG and semiconductor stocks has resulted in some improved performance of many software related stocks in recent months relative to other major tech stocks. In general, these stocks face less negative impact from a prolonged trade war between China and the US. Plus, theyare not as exposed to the higher cycle volatility as the semiconductor related stocks. In many respects, Elastic shares many business similarities with these software driven companies, and thus has been more immune from the decline in the stock prices since early October. We remain positive on Elastic NV (ESTC US).
Horiba combines high gearing to semiconductor capital spending with a large and growing automotive test business characterized by upward trending but uneven profitability. At ¥4,545 (Friday, December 21, closing price), its share price has dropped by 53% from an all-time high of ¥9,590 reached last May. Falling demand for semiconductor production equipment and a downward revision to FY Dec-18 sales and profit guidance announced in November appear to be largely in the price.
The downward revision, which cut projected full-year operating profit growth from 15.5% to 2.5%, followed a 22.2% year-on-year decline in operating profit in 3Q and implies a similar rate of decline in 4Q. The weakness is concentrated in Semiconductor Equipment and Automotive Test, the former due to a cyclical downturn in overall demand, the latter due to M&A-related and other one-time expenses. New Automotive Test orders continued to outpace sales, leading to a 9.5% increase in the order backlog during 3Q.
Automotive Test sales and profits should rise next year, while semiconductor equipment sales and profits seem likely to bottom out. In a report issued on December 17, SEMI (the semiconductor equipment and materials industry organization) forecasts a further decline in wafer fab equipment sales in 1H of 2019, followed by recovery in 2H. Other industry sources we talked to before the report was issued had similar views.
This scenario could fall apart due to general economic weakness, American attempts to stifle China’s semiconductor industry, or both. On December 21, Reuters reported that Foxconn “…is in the final stages of talks with the local government of the Chinese city of Zhuhai to build a chip plant there with a total investment of about $9 billion… most of which would be shouldered by the Zhuhai government through subsidies and tax breaks…” This looks like a perfect target for the Americans, but whether or not they will notice or care remains to be seen.
Horiba is now selling at 9.6x our EPS estimate for this fiscal year, 13.4x our estimate for next year and 12.1x our estimate for FY Dec-20. These and other projected valuations are near the bottom of their 5-year historical ranges. If the Semiconductor Equipment division does not recover in 2H of 2019, historical data suggest that its operating profit could drop by 70% rather than the 47% we are now forecasting, resulting in a P/E ratio of 17x. Nevertheless, it is time to start considering when and at what price to buy Horiba.
Horiba is a diversified Japanese maker of precision and analytical devices and systems with a significant presence in the global markets for automotive test, industrial process and environmental analysis, hematology, semiconductor production equipment and scientific instruments. It is by far the world’s leading producer of automotive emission measurement systems (EMS), having supplied about 80% of the installed base worldwide, and also the world’s top manufacturer of mass flow controllers for the semiconductor industry, with an estimated global market share of nearly 60%.
FBN Holdings Plc (FBNH NL) is the oldest and second-largest bank in Nigeria with a market share of 14% of domestic loans.
FBN’s solid franchise provides robust revenue generation capacity (especially in e-business and insurance) plus a solid and cheap funding base complemented by a strong liquidity profile. The Group’s solid funding base of low cost retail deposits, mainly CASA, underpins one of the most competitive in the sector.
Under new management, FBN is focused on a legacy asset quality clean-up and enhancing risk controls. The franchise has exhibited resilience in the face of system-wide asset quality problems, related to some extent to the concentration of oil/gas exposures. Moving forward, profitability can strengthen with improving asset quality though the recent plunge in oil prices represents a threat to this de-risking process. A plus point is the vibrant income streams from e-business and insurance growth drivers.
The operating environment in Nigerian remains challenging: while the country has emerged from a recession, vulnerabilities remain. Lower oil prices, tighter external market conditions, heightened security issues, and delayed policy responses are the main downside risks. The recent fall in oil prices is a concern given Nigeria’s dependency on the commodity and its knock-on effect to the hydrocarbon-exposed Banking System. Although access to foreign currency has eased, due to FX reforms, many borrowers retain limited capacity to service obligations and there are modest opportunities for banks to grow their loan portfolios.
FBN is thus somewhat of a contrarian call given the weakness in the oil market. But one should buy a hydrocarbon “play” when prices are low, not high. Shares trade at a 60% discount to Book Value and stand on a low Mkt Cap./Deposits rating of 8%, far below the global and EM median. FBN commands a dividend-adjusted PEG of 1.3x. Dividend and earnings yields are 3.3% and 15%, respectively. A quintile 1 PH Score™ of 7.7 captures the valuation dynamic while metric change is satisfactory. Combining franchise valuation and PH Score™, FBN stands in the top quintile of opportunity globally. The asset quality position and interrelated lower profitability vis-a-vis peers is a reason behind FBN’s lower credit rating and relatively low valuation. We are somewhat sceptical that FBN’s underlying creditworthiness and valuation are efficiently evaluated versus more popular counterparts.
Strong net profit momentum and more attractive to analysts relative to its sector
Higher power demand trend from new industrial consumers should continue supporting electricity sales, revenue rose 31% YoY in 3Q18
Large capacity expansion from Xayaburi hydroelectric power plant in Laos with expected commercial operation date (COD) in 4Q19 to more than double CKP’s current effective capacity
Trades above ASEAN Utilities at 19CE* 45.1x PE but offers great EPS growth in a sector that is expected to remain flattish
Risk: Delays for new plants, change in government regulation
As per reports, Infosys Ltd (INFO IN) may consider a proposal for a share buyback of $1.60 billion very soon. The buyback announcement is likely to be made on January 11 when the company board meets to consider the 3Q FY19 results. Before this, in November 2017, Infosys Ltd (INFO IN) had announced a buyback and spent Rs130 bn to buy a total of 113mn equity shares. This fresh buyback could be an important development and could be an important support for the stock, it is also sensible for other reasons.
There are no major acquisitions in recent times by Infosys Ltd (INFO IN) and if this is likely to be the trend for near future, share buyback is not a bad idea. The company is still struggling with some of the legacy issues and the priority as of now is to streamline the organic growth. We think Infosys Ltd (INFO IN) is also cautious with inorganic growth opportunities as the company had serious issues with acquisitions in the past. What could be another key driver behind this is that in valuation terms, Infosys Ltd (INFO IN) is not very expensive.
During the second half of December 2018, Japan saw two telecom companies list on the Tokyo Stock Exchange: Softbank Corp (9434 JP) and ARTERIA Networks (4423 JP). After years of industry consolidation, which saw several stocks delist, this felt like a Christmas miracle (at least for those watching the sector’s stocks).
It would be hard to find two companies in the same industry that are so different – both in their business models as well as in how their IPOs were positioned to investors. One stock is 100 times larger than the other, but this is not a story of David and Goliath. It is two unique stories in parallel.
While each company took a very different approach to selling its stock, both have suffered from the subsequent broader market weakness, irrespective of company specifics. We can’t say it has been the worst of times, but it certainly has been a tough time with SoftBank Corp down 13% and Arteria down 20% from their IPO prices.
In this Insight we explore how each company approached its IPO and how each has fared since.
Good payout ratio, good growth in core profit, and strong long-term sales growth relative to its sector
Acquisition of 49% stake in a 30MW solar farm in Malaysia with a commercial operation date (COD) set for 1Q20 to support revenue growth
High volume of solar rooftop installation projects planned for Charoen Pokphand Foods Pub (CPF TB) and other private firms to boost GUNKUL’s construction revenue
Attractive at 19CE* PEG ratio of 0.5 relative to ASEAN Industry at 1.6
Risk: Lower than expected electricity demand, unfavorable weather conditions
We maintain a BUY rating on ASAP with new 2019E target price of Bt3.80 (from Bt6.50), derived from 19.6xPE, which is 1.0x PEG of earnings growth in 2019-20E.
The story:
Trimmed 2018-20F earnings forecast by 35%
Not a falling knife, but fallen angel
Potential disruptor in car rental industry
Expect a 20% CAGR for earnings in 2019-20E
Risks:
Contract termination of airport space leases
Participating in a highly competitive industry
Cash-flow management will be a challenge in a growth phase
Maruti Suzuki’s Q2FY19 results were below our expectations. Sales grew by only 2% YoY in Q2FY19 led by a 3.7% increase in realization per unit. But the volumes declined by 1.5% YoY in the same period. We analyze the results.
Low correlation to the Thai market, low correlation with Western stock markets, and cheap on a PE basis relative to its sector
Stable cash flow from new contract for FGEN’s San Gabriel plant to sell its entire capacity of 414 MW to Meralco Manila Electric Company (MER PM) until 2024
Geothermal-energy producer EDC has been delisted through a share buyback tender offer, FGEN to benefit from higher equity stake (47% vs 42%) and more control over the firm to implement longer-term strategies
Trades at discount to ASEAN Utilities at 19CE* 6.5x PE and offers much better EPS growth
Risks: Facility breakdowns, uncertainty regarding plans for LNG facility
Tracking Traffic/Containers & Air Cargo is the hub for all of our research on container shipping and air cargo, featuring analysis of monthly industry data, notes from our conversations with industry participants, and links to recent company and thematic pieces.
Tracking Traffic/Containers & Air Cargo aims to highlight changes to existing trends, relationships, and views affecting the leading Asian companies in these two sectors. This month’s note includes data from about twenty different sources.
In this issue readers will find:
An analysis of November container shipping rates, which our index suggests increased by over 20% Y/Y. We concede that our index skews toward volatile spot rates rather than contract rates, but we suspect higher average container rates in Q418, combined with moderating fuel prices, will result in surprisingly strong earnings for the quarter.
A look at November air cargo activity and air cargo pricing, which diverged. The volume of air cargo handled by the five airlines we track declined slightly (-0.1% Y/Y) but some of those carriers reported sharply higher yields (circa +10% Y/Y), due to limited capacity expansion in the region.
Some good news: fuel prices have continued to moderate. Bunker climbed by just 5.1% Y/Y as of mid-December, and jet fuel prices have fallen about 11% Y/Y. Given firm container rates and air cargo pricing, the drop in fuel prices bodes well for Q418 margins, though it’s unclear whether such gains are sustainable.
Although slowing demand growth is unlikely to generate impressive top-line improvements, firmer pricing combined with lower fuel costs should support an ongoing improvement in profitability for container carriers and air cargo operations in the near-term. We believe many investors remain too pessimistic regarding near-term earnings for container carriers and airlines.
Lic Housing Finance (LICHF IN), founded by Life Insurance Corporation of India, is the 2nd largest Housing Finance Company (HFC) in India with a total outstanding loan book portfolio of Rs 1,759 bn as of 2QFY19. 94% of the company’s loans were to retail customers as home loans & Loan Against Properties (LAP) and the balance 6% were to project developers as of 2QFY19.
We like the business of LICHF for following reasons:
LICHF focuses on the salaried segment. 86% of the customers as of 2QFY19 were from the salaried class. This provides the company with stability in earnings and better asset quality. We expect the NIMs & Spreads to be stable at 2.4% & 1.2% respectively for the period of FY18-21E.
We expect LICHF’s total loan book to grow at a CAGR of 16% over the period of FY18-21E. This growth will be supported by LAP and Developer loans. We expect the retail home loan portfolio to grow at a CAGR of 11% over the same period.
As the company focuses on LAP & developer segment to grow the total loan book, we expect this to affect the asset quality adversely. We expect the Gross Non-Performing Assets (GNPA) & Net Non-Performing Assets (NNPA) to increase to 1.3% (from 1.2% as of Sept-18) & 0.5% (from 0.4% as of Sept-18) respectively.
We initiate coverage on LICHF with a fair value estimate of Rs 570/- over the next 12 months. This implies a potential upside of 19% from the closing market price of Rs 481 as on 20th December 2018. This is arrived by applying P/ABV (Price to Adjusted Book Value) multiple of 1.7X to our Adjusted Book Value Estimate of Rs 337 per share for the period ending Sept-20E.
Particulars
FY18
FY19E
FY20E
FY21E
P/ABV (X)
2.1
1.7
1.5
1.3
ROE (%)
17.3
15.5
14.5
15.1
ROA (%)
1.3
1.2
1.2
1.2
Source: Trivikram Consultants Research as of 20th December 2018
Improving asset turnover, good risk adjusted price momentum, and relatively strong analyst recommendations relative to its sector
Larger distribution channel through acquisition of DNA Retail Link to add 95 more stores to current 518 stores
New mobile product launches in 4Q18 and COM7’s focus on high margin products, such as Android smartphones, should support high earnings growth which was up 56% YoY in 3Q18
Attractive at a 19CE* PEG of 0.9 versus ASEAN sector at a PEG of 2.7
Risks: Lower-than-expected demand for new IT products, slower-than-expected store expansions
During this quarter, we visited 13 companies and have to admit the average quality has improved. Amongst these, there were four stocks that impressed us the most, and the Oscars go to…
SSP acheiving profit growth in excess of 20% in the backdrop of Thai economic headwinds and Trumpian trade wars by expanding into countries unaffected by both issues.
Amata VN capitalizing on the shift from locations with rising labor costs (eg Thailand, China) to Vietnam, which has more than a few geographic and demographic advantages.
Gunkul, arguably Thailand’s hottest renewable play at the moment delivering outsized long-term growth in solar/wind space as well as a promising solar roof game plan.
TIGER, an aggressive and small construction company that has only IPO’d for less than a quarter and is already highlighting aggressive growth plans.
The Islami Bank Bangladesh (ISLAMI BD) narrative is underpinned by a quintile 1 global PH Score™ and a lowly franchise valuation by global standards.
ISLAMIBANK is a Shariah-centric entity, basing its operations on partnership, profit-sharing, a principal-agent/ lessee-lessor relationship, and trading via traditional concepts of Murabaha, Mudaraba, Musharakah, Muajjal, Ijarah, Ujarah, and Wadiah. The bank’s asset-base is dominated by “investments” relating to Bai-Murabaha (asset financing with a mark-up) and hire purchase under Shirkatul Melk with modest exposure to Bai-Muajjal, Quard, Bai-Salam, Mudaraba and Musharaka. More than 50% of “Investments” relate to the industrial space, in particular to textiles (spinning/weaving/dyeing), to agriculture, to garments and accessories, and to steel (re-rolling and engineering). About 90% of “investments” stem from urban areas. There is a focus on Dhaka and Ctittagong opportunity. Source of Funding is based on Mudarabah.
While the economy is in a relatively stable state, the Banking Sector presents a highly mixed picture. Funding and liquidity are adequate in the Banking System. At the main listed entities, ROA and ROE stand at around 1% and 12%. Capitalisation targets are moving in the right direction though there is a shortfall at a number of lenders. The sector is weighed down by SOCB asset quality and poor governance which needs to be addressed as it exerts a distortionary impact across the system. SOCB NPL ratio stands at around 30% and is probably worse than this versus around 10% for the system in general. The system stressed loan/investment ratio is probably double this level. Worryingly, private sector bank defaults are rising at a fast clip too.
Shares of ISLAMIBANK stand on an Earnings Yield of 13.5%, a P/B of 0.7x, and a FV at 5%, well below EM and global medians. Shares yield 4.3%. A quintile 1 PH Score™ of 8.2 captures value-quality attributes. Combining franchise valuation and PH Score™, ISLAMIBANK stands in the top decile of opportunity globally. Shares seem to discount any good news.
Bank St Petersburg PJSC (BSPB RM) benefits from an entrenched market position and strong brand recognition in its home market of City of St. Petersburg –represented by sectors such as pharmaceuticals, medical materials, motor vehicles, trailers/semi-trailers, food products, textiles, and rubber /plastic goods- as well as Kaliningrad and Leningrad.
BSPB’s asset base is a quite diversified. While management focuses on relatively low-risk and hence low-yielding loans to core large corporates and mortgages, the consumer credit segment and autos are a fast-growing area.
Top Russian banks tend to have a technological edge vis-a-vis other EMs. BSPB‘s Internet Bank ( i.bspb.ru) remains one of the best in Russia exhibiting a 25% growth in retail customers to 960k last year. A recent innovation was the launch of a mobile website which was created as part of the integrated environment based on BSPB Mobile banking apps for iOS, Android, and WindowsMobile . The e-banking system is currently used by more than 95% of the corporate customers of BSPB with 99% of payments and FX transactions being made online. BSPB cards support all the cutting-edge mobile payment technologies offered by Apple Pay, Samsung Pay and Android Pay.
A key of BSPB’s strategic plan is to achieve a sustained ROAE of 15%+. The bank also vows to remain among the top 20 Russian banks by assets and to increase transaction revenues by 50% over 2018-20. In order to achieve these goals, management is committed to expand the low-risk transaction business and bolster corporate lending by introducing industry expertise and specialisation and a segmental approach matching customer demand with high quality services and products.
Independent directors make up at least 1/3 of the Supervisory Board.
BSPB stands out trading at a 70% discount to Book Value and lies on a low Mkt Cap./Deposits rating of 6%, far below the global and EM median. BSPB commands a huge dividend-adjusted PEG of 5x with expected growth more than 3x its PER. Shares yield 3.5%. A quintile 1 PH Score™ of 9.4 captures the valuation dynamic while metric change is satisfactory. Combining franchise valuation and PH Score™, BSPB stands in the top decile of opportunity globally.
Improving asset turnover, relatively strong analyst recommendations, and slow asset growth relative to its sector
New launches in FY2019-20 e.g. CX-3 facelift and 7-seat SUV CX-8 should stimulate sales going forward. Sales were up by 24% in 1QFY19 YoY
Equity income from JV with Mazda Motor (7261 JP) should increase as production volume ramps up to meet strong ASEAN demand. Production up by 40% YoY in FY2018
Attractive at a 19CE* 0.4 PEG ratio versus ASEAN Consumer Discretionary at a PEG of 0.9 and BAUTO is net cash
Risks: Regulations and sluggish consumer demand, FX risk JPY and PHP
Oil prices are now similar to where they were during 2017 when Singapore’s banks faced significant credit quality stresses. This was due to oil service sector lending, where bad loans here have generally not even declined. With a key driver of this sector distress in the past showing radical weakness yet again, the risk is resurgence in credit costs at Singapore banks during 4Q18. At the same time, global banks are telling a story. It is one not of a robust global economy, but one that is weakening. We have written at length about our concerns of rising rates due to policy rather than real demand, and it remains core to our global bank view. Perhaps Canada’s weak inflation rate – coming below target – is just another global example in addition to countries in Europe and UK, that underlying demand is simply not that robust?
