In this briefing:
- Company Visits: The Best of November/December 2018
- Islami Bank Bangladesh: Cheap in a Risky Sector
- Bank St Petersburg: A Christmas Cracker of Value
- BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum
- Global Banks – DBS Frail Against Global Peers
1. Company Visits: The Best of November/December 2018
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.
2. Islami Bank Bangladesh: Cheap in a Risky Sector
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.
3. Bank St Petersburg: A Christmas Cracker of Value
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.
4. BAUTO (BAUTO MK): New Models to Keep Strong Sales Momentum
- 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
* Consensus Estimates
5. Global Banks – DBS Frail Against Global Peers
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?
