Category

Value Investing

Brief Value Investing: Westpac Banking: Looking Fragile and more

By | Value Investing

In this briefing:

  1. Westpac Banking: Looking Fragile

1. Westpac Banking: Looking Fragile

Australia%20bankscharting%20image%20export%20 %20feb%2024th%202019%2011 13 38%20am

Westpac Banking (WBC AU) is facing a class action suit regarding alleged irresponsible lending in home loans since 2011. This is the first class action against a major Australian bank since the publication of the royal commission’s final report.

The ramifications of the royal commission report remain a source of debate with elections coming up. But, in general, banks will not be allowed to conduct operations in a “business-as-usual way”. There will be consequences for credit provision.

Westpac’s Balance Sheet looks decidedly fragile as it stands. The bank is entering a slowdown from a position of weakness.

Exposures to Australia’s slowing economy (not unrelated of course to China), the dovish turn at the Central Bank, and in particular its bubbly housing market make us hyper cautious. The highly volatile Aussie dollar tumbled from levels above $0.7200 to below $0.7100 following reports that China banned coal imports from the country at a major port.

Despite the sinking share prices of Australia’s main banks, valuations may still be too high given the varied headwinds.

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Brief Value Investing: Westpac Banking: Looking Fragile and more

By | Value Investing

In this briefing:

  1. Westpac Banking: Looking Fragile
  2. Tochigi Bank (8550JP): Red Flags but No White Flags (Yet)

1. Westpac Banking: Looking Fragile

Australia%20bankscharting%20image%20export%20 %20feb%2024th%202019%2011 13 38%20am

Westpac Banking (WBC AU) is facing a class action suit regarding alleged irresponsible lending in home loans since 2011. This is the first class action against a major Australian bank since the publication of the royal commission’s final report.

The ramifications of the royal commission report remain a source of debate with elections coming up. But, in general, banks will not be allowed to conduct operations in a “business-as-usual way”. There will be consequences for credit provision.

Westpac’s Balance Sheet looks decidedly fragile as it stands. The bank is entering a slowdown from a position of weakness.

Exposures to Australia’s slowing economy (not unrelated of course to China), the dovish turn at the Central Bank, and in particular its bubbly housing market make us hyper cautious. The highly volatile Aussie dollar tumbled from levels above $0.7200 to below $0.7100 following reports that China banned coal imports from the country at a major port.

Despite the sinking share prices of Australia’s main banks, valuations may still be too high given the varied headwinds.

2. Tochigi Bank (8550JP): Red Flags but No White Flags (Yet)

8550 tochigi gaijin%20ownership

If one were looking for evidence of the inherent dangers of risk concentration in the banking industry, one need only look to tiny secondary regional bank Tochigi Bank (8550 JP), which reported its earnings for the nine months to end-December 2018 on 31 January 2019.  Having made consolidated net profits of ¥1.57 billion in 1H FY3/2019, the bank plunged into the red in 3Q by ¥1.80 billion as a result of losses on disposing of fixed-rate US$-denominated securities.  Rather surprisingly, foreign investors own just over 21% of outstanding shares.  Tochigi Bank may not be the only small Japanese bank to run into trouble with its foreign securities portfolio in CY2019.  Caveat emptor!  (May the buyer beware)!

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Value Investing: Westpac Banking: Looking Fragile and more

By | Value Investing

In this briefing:

  1. Westpac Banking: Looking Fragile
  2. Tochigi Bank (8550JP): Red Flags but No White Flags (Yet)
  3. LG Uplus: Risks Now Largely Priced In. Raise to Neutral on CJ Hello Deal Synergies

1. Westpac Banking: Looking Fragile

Australia%20bankscharting%20image%20export%20 %20feb%2024th%202019%2011 13 38%20am

Westpac Banking (WBC AU) is facing a class action suit regarding alleged irresponsible lending in home loans since 2011. This is the first class action against a major Australian bank since the publication of the royal commission’s final report.

The ramifications of the royal commission report remain a source of debate with elections coming up. But, in general, banks will not be allowed to conduct operations in a “business-as-usual way”. There will be consequences for credit provision.

Westpac’s Balance Sheet looks decidedly fragile as it stands. The bank is entering a slowdown from a position of weakness.

Exposures to Australia’s slowing economy (not unrelated of course to China), the dovish turn at the Central Bank, and in particular its bubbly housing market make us hyper cautious. The highly volatile Aussie dollar tumbled from levels above $0.7200 to below $0.7100 following reports that China banned coal imports from the country at a major port.

Despite the sinking share prices of Australia’s main banks, valuations may still be too high given the varied headwinds.

2. Tochigi Bank (8550JP): Red Flags but No White Flags (Yet)

8550 tochigi gaijin%20ownership

If one were looking for evidence of the inherent dangers of risk concentration in the banking industry, one need only look to tiny secondary regional bank Tochigi Bank (8550 JP), which reported its earnings for the nine months to end-December 2018 on 31 January 2019.  Having made consolidated net profits of ¥1.57 billion in 1H FY3/2019, the bank plunged into the red in 3Q by ¥1.80 billion as a result of losses on disposing of fixed-rate US$-denominated securities.  Rather surprisingly, foreign investors own just over 21% of outstanding shares.  Tochigi Bank may not be the only small Japanese bank to run into trouble with its foreign securities portfolio in CY2019.  Caveat emptor!  (May the buyer beware)!

3. LG Uplus: Risks Now Largely Priced In. Raise to Neutral on CJ Hello Deal Synergies

Lguplus%20multiples

LG Uplus (032640 KS) shares have fallen around 20% from the highs of January when the market was excited by 5G. That always seemed overly optimistic given the lack of viable business cases and unknown investment requirements and we were comfortable with our Sell rating from mid October and KRW15,000 target price.  Following weak results, an easing of 5G  enthusiasm and the recently announced CJ Hello (037560 KS) deal the share price has fallen to around the KRW15,000. Alastair Jones now thinks a lot of bad news is in the price and the available synergies from CJ Hello offset a weaker earnings outlook. 

Get Straight to the Source on Smartkarma

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Brief Value Investing: Brazilian Political Turmoil Adds to Market Volatility, and Concerns on Pension Reform and more

By | Value Investing

In this briefing:

  1. Brazilian Political Turmoil Adds to Market Volatility, and Concerns on Pension Reform
  2. Is There Still a Bright Future for FutureBright?
  3. Security Bank: Something Makes Me Feel Insecure
  4. Philippines: El Niño’s Comeback – How Bad?
  5. China Blood Products: Deals Highlight Values

1. Brazilian Political Turmoil Adds to Market Volatility, and Concerns on Pension Reform

Brz%20bnks%20pbvs

  • Brazil’s Ex-President Michel Temer has been arrested as part of the on-going CarWash (Lava Jato) criminal investigation, on bribery and corruption charges
  • We believe that this increases the near-term downside risk to the BOVESPA index and blue chips, including the large cap banks
  • This will also, we believe, heighten the negative “noise” around pension reform, potentially increasing the complexity of the reform process; even if this development alone should not serve to derail it, in our view
  • Large cap Brazilian banks’ share prices have come under pressure recently, and we would expect the market correction to continue in the short term
  • Nonetheless, we still see potential for Banco Do Brasil Sa (BBAS3 BZ) to re-rate over the medium term, and narrow the PBV gap with its core peers, Itau Unibanco Holding Sa (ITUB4 BZ) and Banco Bradesco Sa (BBDC4 BZ), as Banco do Brasil’s own internal restructuring takes effect

2. Is There Still a Bright Future for FutureBright?

2

Almost 12 months after posting our initial thesis on Future Bright Holdings (703 HK)Gambling on a Bright Future, we review FutureBright’s most recent results, raising questions on whether stalling improvement in the core restaurant business performance warrants taking chips off the table while waiting for key catalysts to materialise.

3. Security Bank: Something Makes Me Feel Insecure

Sec0059%20%281%29

Security Bank (SECB PM) trades at a premium to Asian banks on a P/Book, franchise valuation, earnings yield, and total return ratio basis.

The PH Score™ of 5.3 is neither good nor bad. (Asia median is 5.7).

In terms of fundamental traction, efficiency has eroded and interconnected profitability has narrowed. “Jaws” are negative. Funding cost growth is sharply in excess of interest income growth. On the other hand, liquidity and capital adequacy are moving in the right direction or are stable.

Asset quality seems to have dramatically improved. Headline non-performing loans are now very low due to adoption of PFRS9. These are calculated now as loans aligned to a default criteria. The bank seems to have reclassified part of “stage 3” impaired loans back into “stage 2”. “Stage 2” is comprised of assets which have experienced a SICR (significant increase in credit risk) since initial recognition, such as substandard, past-dues, and SMLs, and are not classified as NPLs. “Stage 2” represents almost 4% of the loan book versus a headline impaired or problem loan ratio of just 0.64%. In addition, unimpaired past-due loans (73% of headline NPLs) climbed 57% YoY. Charge-offs soared 47% YoY. Perhaps the asset quality is not as pristine as the NPL ratio intimates.

When we look back from 2004, we see an explosive increase in loans (+10x since 2004) coinciding with lower profitability over this period. This is not a good sign. As the bank shifts to consumer lending for growth, up 10x since 2012, we wonder whether a similar pattern will emerge.

In short, the bank resides in the bottom decile of our global VFM (Valuation, Fundamentals, Momentum) rankings.

4. Philippines: El Niño’s Comeback – How Bad?

Charts%20on%20sst%20&%20farm%20gdp%203:15:17

  • With SST (sea surface temperature) in the Pacific past 26oC, El Niño’s comeback is highly likely. Past occurrences of severe El Niño was isolated in the farm sector with upside risks to food prices. While another round of contraction in farm output and employment would be expected, the liberal rice import policy would entice imports to plug the gap between demand-supply in 1H19 and ease potential rice/food price upticks. 
  • The El Niño supply shock would coincide with the global macro slowdown and fiscal spending delays that spawn downside risks to growth. With a legally handicapped fiscal budget, monetary policy may have to step up to ease likelihood of severe, near-term constraints to growth. We believe monetary adjustments would be the appropriate responses to the macro challenges as inflation winds down. Sequencing and appropriate timing of monetary reaction remains key to credible policy responses starting with the bank reserve ratio cut in 2Q19 (staggered cuts for a maximum of 3% this year) followed by policy rate cuts commencing in 3Q19 (cumulative -50bp in 2H19) when inflation hits rock bottom of less than 2%.
  • Buy bonds with preference for the curve’s belly to short-duration.

5. China Blood Products: Deals Highlight Values

Albumin%20per%20capita%20utilization%20by%20country%202017%20grifols

Grifols SA (GRF SM) and Shanghai RAAS Blood Products Co Ltd (002252.SZ) recently announced an asset exchange that effectively combines the companies’ blood products operations in China. This transaction marks the third investment (two are cross-border) into the industry in the last two years. Despite some challenges arising from recent healthcare reforms, the industry has favorable supply/demand dynamics and high barriers to entry. US-listed China Biologic Products (CBPO US) trades at a significant discount to the implied private market values, but requires patience as management adjusts to the new operating environment.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Value Investing: Tochigi Bank (8550JP): Red Flags but No White Flags (Yet) and more

By | Value Investing

In this briefing:

  1. Tochigi Bank (8550JP): Red Flags but No White Flags (Yet)
  2. LG Uplus: Risks Now Largely Priced In. Raise to Neutral on CJ Hello Deal Synergies

1. Tochigi Bank (8550JP): Red Flags but No White Flags (Yet)

8550 tochigi gaijin%20ownership

If one were looking for evidence of the inherent dangers of risk concentration in the banking industry, one need only look to tiny secondary regional bank Tochigi Bank (8550 JP), which reported its earnings for the nine months to end-December 2018 on 31 January 2019.  Having made consolidated net profits of ¥1.57 billion in 1H FY3/2019, the bank plunged into the red in 3Q by ¥1.80 billion as a result of losses on disposing of fixed-rate US$-denominated securities.  Rather surprisingly, foreign investors own just over 21% of outstanding shares.  Tochigi Bank may not be the only small Japanese bank to run into trouble with its foreign securities portfolio in CY2019.  Caveat emptor!  (May the buyer beware)!

2. LG Uplus: Risks Now Largely Priced In. Raise to Neutral on CJ Hello Deal Synergies

Lguplus%20multiples

LG Uplus (032640 KS) shares have fallen around 20% from the highs of January when the market was excited by 5G. That always seemed overly optimistic given the lack of viable business cases and unknown investment requirements and we were comfortable with our Sell rating from mid October and KRW15,000 target price.  Following weak results, an easing of 5G  enthusiasm and the recently announced CJ Hello (037560 KS) deal the share price has fallen to around the KRW15,000. Alastair Jones now thinks a lot of bad news is in the price and the available synergies from CJ Hello offset a weaker earnings outlook. 

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Value Investing: Tochigi Bank (8550JP): Red Flags but No White Flags (Yet) and more

By | Value Investing

In this briefing:

  1. Tochigi Bank (8550JP): Red Flags but No White Flags (Yet)
  2. LG Uplus: Risks Now Largely Priced In. Raise to Neutral on CJ Hello Deal Synergies
  3. Sing Holdings – Surge in Full-Year Earnings with a Surprise Hike in Dividend. 67% Upside. BUY.

1. Tochigi Bank (8550JP): Red Flags but No White Flags (Yet)

8550 tochigi gaijin%20ownership

If one were looking for evidence of the inherent dangers of risk concentration in the banking industry, one need only look to tiny secondary regional bank Tochigi Bank (8550 JP), which reported its earnings for the nine months to end-December 2018 on 31 January 2019.  Having made consolidated net profits of ¥1.57 billion in 1H FY3/2019, the bank plunged into the red in 3Q by ¥1.80 billion as a result of losses on disposing of fixed-rate US$-denominated securities.  Rather surprisingly, foreign investors own just over 21% of outstanding shares.  Tochigi Bank may not be the only small Japanese bank to run into trouble with its foreign securities portfolio in CY2019.  Caveat emptor!  (May the buyer beware)!

2. LG Uplus: Risks Now Largely Priced In. Raise to Neutral on CJ Hello Deal Synergies

Lguplus%20multiples

LG Uplus (032640 KS) shares have fallen around 20% from the highs of January when the market was excited by 5G. That always seemed overly optimistic given the lack of viable business cases and unknown investment requirements and we were comfortable with our Sell rating from mid October and KRW15,000 target price.  Following weak results, an easing of 5G  enthusiasm and the recently announced CJ Hello (037560 KS) deal the share price has fallen to around the KRW15,000. Alastair Jones now thinks a lot of bad news is in the price and the available synergies from CJ Hello offset a weaker earnings outlook. 

3. Sing Holdings – Surge in Full-Year Earnings with a Surprise Hike in Dividend. 67% Upside. BUY.

Sing Holdings (SING SP) announced its FY18 full-year results this evening.

Results were largely in line with expectations.

Take-up rate at Parc Botannia improved from 62% in 3Q FY19 to 66% in 4Q FY19. With the biggest agency in Singapore marketing the project, sales at Parc Botannia is expected to pick up in 2019.

A key surprise in Sing Holdings’ FY18 results was the 20% hike in its dividend to 1.2 S-cents per share in FY18.

My fair value for SHL is pegged at S$0.66 per share, implying an upside potential of 67%. I maintain my BUY recommendation on Sing Holdings Ltd.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Value Investing: Tochigi Bank (8550JP): Red Flags but No White Flags (Yet) and more

By | Value Investing

In this briefing:

  1. Tochigi Bank (8550JP): Red Flags but No White Flags (Yet)
  2. LG Uplus: Risks Now Largely Priced In. Raise to Neutral on CJ Hello Deal Synergies
  3. Sing Holdings – Surge in Full-Year Earnings with a Surprise Hike in Dividend. 67% Upside. BUY.
  4. US 10yr Triangle Geared for a Power Breakout

1. Tochigi Bank (8550JP): Red Flags but No White Flags (Yet)

8550 tochigi gaijin%20ownership

If one were looking for evidence of the inherent dangers of risk concentration in the banking industry, one need only look to tiny secondary regional bank Tochigi Bank (8550 JP), which reported its earnings for the nine months to end-December 2018 on 31 January 2019.  Having made consolidated net profits of ¥1.57 billion in 1H FY3/2019, the bank plunged into the red in 3Q by ¥1.80 billion as a result of losses on disposing of fixed-rate US$-denominated securities.  Rather surprisingly, foreign investors own just over 21% of outstanding shares.  Tochigi Bank may not be the only small Japanese bank to run into trouble with its foreign securities portfolio in CY2019.  Caveat emptor!  (May the buyer beware)!

2. LG Uplus: Risks Now Largely Priced In. Raise to Neutral on CJ Hello Deal Synergies

Lguplus%20multiples

LG Uplus (032640 KS) shares have fallen around 20% from the highs of January when the market was excited by 5G. That always seemed overly optimistic given the lack of viable business cases and unknown investment requirements and we were comfortable with our Sell rating from mid October and KRW15,000 target price.  Following weak results, an easing of 5G  enthusiasm and the recently announced CJ Hello (037560 KS) deal the share price has fallen to around the KRW15,000. Alastair Jones now thinks a lot of bad news is in the price and the available synergies from CJ Hello offset a weaker earnings outlook. 

3. Sing Holdings – Surge in Full-Year Earnings with a Surprise Hike in Dividend. 67% Upside. BUY.

Sing Holdings (SING SP) announced its FY18 full-year results this evening.

Results were largely in line with expectations.

Take-up rate at Parc Botannia improved from 62% in 3Q FY19 to 66% in 4Q FY19. With the biggest agency in Singapore marketing the project, sales at Parc Botannia is expected to pick up in 2019.

A key surprise in Sing Holdings’ FY18 results was the 20% hike in its dividend to 1.2 S-cents per share in FY18.

My fair value for SHL is pegged at S$0.66 per share, implying an upside potential of 67%. I maintain my BUY recommendation on Sing Holdings Ltd.

4. US 10yr Triangle Geared for a Power Breakout

Us%20t%20note%20yield

Our macro stance touted a bearish yield scenario from 3.26% and again once below 3% with a target of 2.62% and has since been revised lower. Recent yield fade call from 2.80% targets much lower yields and will have a ripple effect globally.

A fresh plunge in yield would favor rate sensitive assets and warn of a harder slow down cycle. The bond market is pounding the table that global growth will slow more dramatically than what is currently priced into market and equities.

The offset is clearly a more dovish CB tone, China stimulus and closing in on sentiment capitulation.

Triangulation breakout will offer a powerful trade. Yields are set for a big move.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Value Investing: Is There Still a Bright Future for FutureBright? and more

By | Value Investing

In this briefing:

  1. Is There Still a Bright Future for FutureBright?
  2. Security Bank: Something Makes Me Feel Insecure
  3. Philippines: El Niño’s Comeback – How Bad?
  4. China Blood Products: Deals Highlight Values
  5. Woori Bank: Overhang Versus Valuation

1. Is There Still a Bright Future for FutureBright?

1

Almost 12 months after posting our initial thesis on Future Bright Holdings (703 HK)Gambling on a Bright Future, we review FutureBright’s most recent results, raising questions on whether stalling improvement in the core restaurant business performance warrants taking chips off the table while waiting for key catalysts to materialise.

2. Security Bank: Something Makes Me Feel Insecure

Sec0059%20%281%29

Security Bank (SECB PM) trades at a premium to Asian banks on a P/Book, franchise valuation, earnings yield, and total return ratio basis.

The PH Score™ of 5.3 is neither good nor bad. (Asia median is 5.7).

In terms of fundamental traction, efficiency has eroded and interconnected profitability has narrowed. “Jaws” are negative. Funding cost growth is sharply in excess of interest income growth. On the other hand, liquidity and capital adequacy are moving in the right direction or are stable.

Asset quality seems to have dramatically improved. Headline non-performing loans are now very low due to adoption of PFRS9. These are calculated now as loans aligned to a default criteria. The bank seems to have reclassified part of “stage 3” impaired loans back into “stage 2”. “Stage 2” is comprised of assets which have experienced a SICR (significant increase in credit risk) since initial recognition, such as substandard, past-dues, and SMLs, and are not classified as NPLs. “Stage 2” represents almost 4% of the loan book versus a headline impaired or problem loan ratio of just 0.64%. In addition, unimpaired past-due loans (73% of headline NPLs) climbed 57% YoY. Charge-offs soared 47% YoY. Perhaps the asset quality is not as pristine as the NPL ratio intimates.

When we look back from 2004, we see an explosive increase in loans (+10x since 2004) coinciding with lower profitability over this period. This is not a good sign. As the bank shifts to consumer lending for growth, up 10x since 2012, we wonder whether a similar pattern will emerge.

In short, the bank resides in the bottom decile of our global VFM (Valuation, Fundamentals, Momentum) rankings.

3. Philippines: El Niño’s Comeback – How Bad?

Charts%20on%20sst%20&%20farm%20gdp%203:15:17

  • With SST (sea surface temperature) in the Pacific past 26oC, El Niño’s comeback is highly likely. Past occurrences of severe El Niño was isolated in the farm sector with upside risks to food prices. While another round of contraction in farm output and employment would be expected, the liberal rice import policy would entice imports to plug the gap between demand-supply in 1H19 and ease potential rice/food price upticks. 
  • The El Niño supply shock would coincide with the global macro slowdown and fiscal spending delays that spawn downside risks to growth. With a legally handicapped fiscal budget, monetary policy may have to step up to ease likelihood of severe, near-term constraints to growth. We believe monetary adjustments would be the appropriate responses to the macro challenges as inflation winds down. Sequencing and appropriate timing of monetary reaction remains key to credible policy responses starting with the bank reserve ratio cut in 2Q19 (staggered cuts for a maximum of 3% this year) followed by policy rate cuts commencing in 3Q19 (cumulative -50bp in 2H19) when inflation hits rock bottom of less than 2%.
  • Buy bonds with preference for the curve’s belly to short-duration.

4. China Blood Products: Deals Highlight Values

Albumin%20per%20capita%20utilization%20by%20country%202017%20grifols

Grifols SA (GRF SM) and Shanghai RAAS Blood Products Co Ltd (002252.SZ) recently announced an asset exchange that effectively combines the companies’ blood products operations in China. This transaction marks the third investment (two are cross-border) into the industry in the last two years. Despite some challenges arising from recent healthcare reforms, the industry has favorable supply/demand dynamics and high barriers to entry. US-listed China Biologic Products (CBPO US) trades at a significant discount to the implied private market values, but requires patience as management adjusts to the new operating environment.

5. Woori Bank: Overhang Versus Valuation

Given overhang risk, investors have been bailing out of Woori or taking short positions. Woori Bank Employees Stock Ownership Association seems to have absorbed part of the selling from the likes of Blackrock, Samsung Asset, SEB Investment, Northern Trust, State Street, Russell Investment, and JP Morgan Asset. We do note though that Vanguard and TIAA have increased their position during the HoldCo transition.

There is still to come the 12% stake in Woori Holdings that Woori Bank receives relating to the transfer of the credit card entity that needs to be sold. KDIC’s 18% stake adds to the overhang risk. With https://www.smartkarma.com/insights/woori-bank-holdco-conversion-current-status-trade-approach Sanghyun Park has detailed the risk.

We delve into the latest financials of Woori Financial Group. The picture is mixed. While efficiency advances were the main positive standout, we highlight sharply higher funding costs and a build-up of precautionary loans as main areas of concern. The bottom line was also boosted by much lower loan loss provisions as headline NPLs fell.

A constructive view of the Group is thus based on the credibility of what appears to be underlying asset improvement and the benefits of returning to HoldCo status.

We conclude that despite the overhang risk, shares are not expensive. Shares inhabit the highest decile of our global VFM (Valuation, Fundamentals, Momentum) rankings. There may though be a better entry point for bargain hunters.

Get Straight to the Source on Smartkarma

Smartkarma supports the world’s leading investors with high-quality, timely, and actionable Insights. Subscribe now for unlimited access, or request a demo below.



Brief Value Investing: Security Bank: Something Makes Me Feel Insecure and more

By | Value Investing

In this briefing:

  1. Security Bank: Something Makes Me Feel Insecure
  2. Philippines: El Niño’s Comback – How Bad?
  3. China Blood Products: Deals Highlight Values
  4. Woori Bank: Overhang Versus Valuation
  5. SUTL: Puteri Harbor Construction Started Last Week, Membership Sales to Follow, Cash = 84% of MktCap

1. Security Bank: Something Makes Me Feel Insecure

Sec1

Security Bank (SECB PM) trades at a premium to Asian banks on a P/Book, franchise valuation, earnings yield, and total return ratio basis.

The PH Score™ of 5.3 is neither good nor bad. (Asia median is 5.7).

In terms of fundamental traction, efficiency has eroded and interconnected profitability has narrowed. “Jaws” are negative. Funding cost growth is sharply in excess of interest income growth. On the other hand, liquidity and capital adequacy are moving in the right direction or are stable.

Asset quality seems to have dramatically improved. Headline non-performing loans are now very low due to adoption of PFRS9. These are calculated now as loans aligned to a default criteria. The bank seems to have reclassified part of “stage 3” impaired loans back into “stage 2”. “Stage 2” is comprised of assets which have experienced a SICR (significant increase in credit risk) since initial recognition, such as substandard, past-dues, and SMLs, and are not classified as NPLs. “Stage 2” represents almost 4% of the loan book versus a headline impaired or problem loan ratio of just 0.64%. In addition, unimpaired past-due loans (73% of headline NPLs) climbed 57% YoY. Charge-offs soared 47% YoY. Perhaps the asset quality is not as pristine as the NPL ratio intimates.

When we look back from 2004, we see an explosive increase in loans (+10x since 2004) coinciding with lower profitability over this period. This is not a good sign. As the bank shifts to consumer lending for growth, up 10x since 2012, we wonder whether a similar pattern will emerge.

In short, the bank resides in the bottom decile of our global VFM (Valuation, Fundamentals, Momentum) rankings.

2. Philippines: El Niño’s Comback – How Bad?

Charts%20on%20sst%20&%20farm%20gdp%203:15:17

  • With SST (sea surface temperature) in the Pacific past 26oC, El Niño’s comeback is highly likely. Past occurrences of severe El Niño was isolated in the farm sector with upside risks to food prices. While another round of contraction in farm output and employment would be expected, the liberal rice import policy would entice imports to plug the gap between demand-supply in 1H19 and ease potential rice/food price upticks. 
  • The El Niño supply shock would coincide with the global macro slowdown and fiscal spending delays that spawn downside risks to growth. With a legally handicapped fiscal budget, monetary policy may have to step up to ease likelihood of severe, near-term constraints to growth. We believe monetary adjustments would be the appropriate responses to the macro challenges as inflation winds down. Sequencing and appropriate timing of monetary reaction remains key to credible policy responses starting with the bank reserve ratio cut in 2Q19 (staggered cuts for a maximum of 3% this year) followed by policy rate cuts commencing in 3Q19 (cumulative -50bp in 2H19) when inflation hits rock bottom of less than 2%.
  • Buy bonds with preference for the curve’s belly to short-duration.

3. China Blood Products: Deals Highlight Values

Immunoglobulin%20supply demand%20csl

Grifols SA (GRF SM) and Shanghai RAAS Blood Products Co Ltd (002252.SZ) recently announced an asset exchange that effectively combines the companies’ blood products operations in China. This transaction marks the third investment (two are cross-border) into the industry in the last two years. Despite some challenges arising from recent healthcare reforms, the industry has favorable supply/demand dynamics and high barriers to entry. US-listed China Biologic Products (CBPO US) trades at a significant discount to the implied private market values, but requires patience as management adjusts to the new operating environment.

4. Woori Bank: Overhang Versus Valuation

Given overhang risk, investors have been bailing out of Woori or taking short positions. Woori Bank Employees Stock Ownership Association seems to have absorbed part of the selling from the likes of Blackrock, Samsung Asset, SEB Investment, Northern Trust, State Street, Russell Investment, and JP Morgan Asset. We do note though that Vanguard and TIAA have increased their position during the HoldCo transition.

There is still to come the 12% stake in Woori Holdings that Woori Bank receives relating to the transfer of the credit card entity that needs to be sold. KDIC’s 18% stake adds to the overhang risk. With https://www.smartkarma.com/insights/woori-bank-holdco-conversion-current-status-trade-approach Sanghyun Park has detailed the risk.

We delve into the latest financials of Woori Financial Group. The picture is mixed. While efficiency advances were the main positive standout, we highlight sharply higher funding costs and a build-up of precautionary loans as main areas of concern. The bottom line was also boosted by much lower loan loss provisions as headline NPLs fell.

A constructive view of the Group is thus based on the credibility of what appears to be underlying asset improvement and the benefits of returning to HoldCo status.

We conclude that despite the overhang risk, shares are not expensive. Shares inhabit the highest decile of our global VFM (Valuation, Fundamentals, Momentum) rankings. There may though be a better entry point for bargain hunters.

5. SUTL: Puteri Harbor Construction Started Last Week, Membership Sales to Follow, Cash = 84% of MktCap

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Sutl Enterprise (SUTL SP) did not grow revenues in 2018 as it continued to operate only its flagship Sentosa marina. Change is coming as it has 9 projects in the pipeline which could dramatically alter the financial future of the company by FY21. 

The biggest news is the groundbreaking of Puteri Harbor in Malaysia last week. With a sales gallery opening by May 2019, it will be very interesting to follow the progress on this project and its contribution to SUTL’s top/bottom-line results in FY19/FY20.

SUTL is misunderstood by investors because management disclosure is lacking and liquidity is poor. The valuation of SUTL could be improved if investors had a better understanding of the earnings trajectory we could expect in FY19-FY21.

We realize the Tay family is not looking to sell its stake anytime soon so is not concerned about its current market cap. We caution that this might not be a smart way to run a publicly listed company as a more expensive ‘currency’  (stock price) might help the company be taken more seriously when attempting to make acquisitions overseas. 

However, this does not alter the fact that 84% of the market cap is cash and the EV of this consistently profitable company is barely 6.7M USD. SUTL is undeniably one of the cheapest stocks on SGX.

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Brief Value Investing: Petrochina Breakout and Laggard Play and more

By | Value Investing

In this briefing:

  1. Petrochina Breakout and Laggard Play

1. Petrochina Breakout and Laggard Play

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Petrochina Co Ltd H (857 HK) has remains suppressed but with oil perking up there is a laggard upside play taking shape as we begin to see distribution in HK upside leaders. On weakness we like positioning on the long side and can be used as a pair with an index short or one of the steel counters.

Given stock leaders are showing deteriorating upside momentum, we expect laggards to attract more attention.

RSI and MACD breakout patterns outlined as well as the price breakout at 5.10.

A bigger descending wedge also shows promise as a secondary breakout trigger.

MACD pattern resistance will help define the trending capability post breakout.

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