Brief Equities Bottom-Up: BIMB: Market Gives Thumbs-Up to Results and more

In this briefing:

1. BIMB: Market Gives Thumbs-Up to Results
2. Blue Bird (BIRD IJ) – Transport Wizzard with a Twist – On the Ground in J-Town
3. Topcon (7732 JP): Weak 3Q, Likely to Fall Short of FY Mar-19 Guidance
4. Tesla (TSLA): The Cost of Innovation Seems to Be Catching Up
5. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town

1. BIMB: Market Gives Thumbs-Up to Results

Malaysia has a tailwind of a new administration, vowing to overturn many aspects of its predecessor – including cancelling mega infra projects and reducing the “real” National debt.

The economy is relatively buoyant and is slated to generate an average of 4.75% GDP growth over 2018-2022. Private consumption will remain the main driver of growth, still the domestic economy continues to face downside risks stemming from any further escalation in trade tensions and commodity related shocks. Inflation has mellowed, supported by the cut in GST, but will still, once these effects diminish, be modest, at around 2%. Unemployment is low and there is a current account surplus.

Bimb Holdings (BIMB MK) or BHB commands two subsidiaries, Bank Islam and Takaful Malaysia. Bank Islam is a niche consumer-centred lender with a focus on mortgages: the largest component of the loan book and growing at a double-digit pace. Loans are therefore >5 years while funding tends to be <1 year. The insurance operation is BIMB’s most profitable revenue stream though. There is a concerted focus on the brand, on strategic bank partnerships, and on digitalisation. Both subsidiaries are rooted in Shariah-compliance. (Islamic Finance is a fast-growing market share in Malaysia). We do not rule out corporate reorganisation initiatives to unlock further value. The main shareholder is Lembaga Tabung Haji, a religious pilgrim fund board.

While BIMB is less sensitive to government actions on sovereign guarantees for infra projects, the bank is mainly exposed to consumer credit trends and cycle. Malaysia has a high level (by Asian standards) of household (excluding mortgages) indebtedness, dominated by credit cards, auto finance, and personal loans. Some areas of consumer banking reflect a stretched DSR, underpinning a moderately high risk by credit-to-GDP gap. The corporate sector is not excessively leveraged. BIMB though commands strong asset quality, provisioning, and capitalisation levels.

2. Blue Bird (BIRD IJ) – Transport Wizzard with a Twist – On the Ground in J-Town

A visit in Jakarta to the Blue Bird (BIRD IJ) office was well-timed as the company is close to the conclusion of two corporate actions, as well as an interesting extension to its relationship with Go-Jek Indonesia (1379371D IJ).

Both acquisitions are synergistic with its existing business and represent long-term opportunities rather than an immediate significant boost to earnings.

The company’s underlying fundamentals continue to improve with fleet utilisation up versus last year in 4Q18, as was the average revenue per taxi.

The company continues to see the benefits of its tie-up with Go-Jek, which will soon morph into something even more significant.

Blue Bird (BIRD IJ) remains an interesting way to play the rising levels of affluence amongst the rising middle classes in Indonesia. the company is close to completing two corporate actions including a new venture into the car auction business with Mitsubishi UFJ and the acquisition of an intercity bus company. It is also close to signing an extension and expansion of its relationship with Go-Jek, which will help to cement its position in the online ride-hailing space. Underlying fundamentals continue to improve both in terms of fleet utilisation and average revenue per taxi. According to Capital IQ consensus, the company trades on  14.9x FY19E PER and 13.7x FY20E PER, with forecast EPS growth of +16.2% and +8.9% for FY19E and FY20E respectively. The near-term completion of two corporate actions and an extension of its agreement with Go-Jek Indonesia (1379371D IJ) should provide positive catalysts for the share price coupled with improving ridership, average revenue per taxi, and fleet utilisation.

3. Topcon (7732 JP): Weak 3Q, Likely to Fall Short of FY Mar-19 Guidance

Topcon’s FY Mar-19 guidance looks over-optimistic. Operating profit was up 8.5% year-on-year on a 1.4% increase in sales in the nine months to December, but down 10.1% on a 2.3% decrease in sales in 3Q. To make management’s full-year targets, it would have to increase by 41.0% on a 6.8% increase in sales in 4Q. The sales of all three major product segments – Smart Infrastructure, Positioning and Eye Care – have been slow. Intra-company eliminations have undercut segment profits.

At ¥1,561 (Friday, March 1, close), the shares are selling at 23.6x our EPS estimate for this fiscal year and 9.8x projected EV/EBITDA. These multiples compare with 5-year historical lows of 16.1x and 6.8x. Japan Analytics’ calculation of Annual No-Growth Valuation shows further downside risk (see chart below). 

4. Tesla (TSLA): The Cost of Innovation Seems to Be Catching Up

Tesla’s innovation, as we have been opining in our insights on Smartkarma, rests more on its direct distribution model than on technological innovation.  Tesla’s press release on Thursday, February 28, announcing the new $35,000 Model 3’s came with several other details that have been highlighted in press reports which we also summarize here:

1. Management does not expect to achieve profitability in 1Q19, with a likely 2Q19 profitability according to the press release.
2. According to the announcement, all Tesla sales will move online, first in the U.S. then expanding worldwide.  An unspecified number of sales outlets will also be closed “with a small number of stores in high-traffic locations remaining as galleries, showcases and Tesla information centers.” (see attached copy of the Form 8K).
3. Management promised to increase investments on after service.
4. According to press reports, CEO Elon Musk was also quoted as saying there will be layoffs with the new distribution plan (see https://edition.cnn.com/business/live-news/elon-musk-tesla-announcement/index.html).

The Tesla Model 3

5. Surya Citra Media (SCMA IJ) – Digital Revolution in the Spring – On the Ground in J-Town

A meeting Surya Citra Media Pt Tbk (SCMA IJ) in Jakarta found management in a relatively ebullient mood. The share price performance has been slightly perplexing the fact that its digital strategy is close to coming to fruition, with upcoming acquisitions representing a positive catalyst.

The company will move forward on acquiring controlling stakes in digital streaming player www.vidio.com, internet company www.kapanlagi.com, and out of home media advertising player EYE Indonesia.

Total revenues from the digital and non-TV space will grow from less than 5% of SCMA’s total revenue to nearly 20% of the total, making it the biggest player in both free-to-air and a major player in digital adverting in Indonesia.

Vidio.com is especially interesting given how fragmented that market is currently. Iy=t already has 22m active users viewing its sport and local content but is looking to bring in a major global player to help finance original content and bring in more international content. 

Internet companies represent the biggest and fastest growing advertising customers outside FMCG. They are increasingly paying above market rates for up to two-hour exclusive slots on prime time, where they air their own programming which allows them to engage with the audience. 

The recent Kraft Heinz Co (KHC US) debacle may signal the end of zero-based budgeting, which may mean global players such as Unilever Indonesia (UNVR IJ) start to spend more on advertising. in the meantime, local FMCG players remain more aggressive on advertising their products on TV. 

Surya Citra Media Pt Tbk (SCMA IJ) remains the best quality proxy to the advertising market in Indonesia. The upcoming acquisitions in the digital space represent strong potential catalysts for the stock, which have not yet been factored into valuations. Its core business continues to register stable and rising growth, especially from local FMCG players, with the re-entry of the tobacco companies potentially representing another boon for this year, given there has been no excise tax increase. According to Capital IQ consensus, the company is trading on 15.3x FY19E PER and 13.8x FY20E PER, with forecasts EPS growth of +8.5% and +10.5% for FY19E and FY20E respectively.  The company is forecast to achieve an ROE of 33% in 2019, with a dividend yield of 4.2%.