Equity Bottom-Up

Daily Equities Bottom-Up: Credit Bank of Moscow: A Highly Ranked EM Opportunity and more

In this briefing:

  1. Credit Bank of Moscow: A Highly Ranked EM Opportunity
  2. Rides War Has Shifted To Share of Wallet
  3. Indonesian Telcos: Mobile Pricing Should Continue to Recover. Telkom Remains Our Top Pick
  4. Z IN
  5. TSMC. Reiterating Our Bullish Stance After Earnings

1. Credit Bank of Moscow: A Highly Ranked EM Opportunity

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Founded in 1992 and acquired by Mr. Roman Avdeev in 1994,Credit Bank Of Moscow Pjsc (CBOM RM) benefits from an entrenched market position and strong brand recognition in its strategic market of Moscow which represents 25% of Russian GDP. CBM is an established operation in Moscow and the Moscow region with over 7,000 devices in high traffic locations.

CBM has expanded fast, from commanding a mere 0.7% share of system Assets in 2013 to 2.9% today.

The bank has a defined strategy underpinned by blue-chip, large, and medium-sized corporate services (fees, settlements, cash handling); high-margin consumer lending; and investment banking (SOVA Capital synergies, interbank, ECM, DCM, M&A). CBM commands a client-base of 15k corporates: companies represent 87% of loans. The bank has 1.5MM retail customers: accounting for a third of deposits.

In 2015 CBM acquired Inkakhran, swelling its nationwide cash handling market share to 17%. In this segment, CBM commands a client-base of 3k, of which 164 are banks, with 876 armoured vehicles covering 33k collection points.

Management is focused on above-system growth, based on a relatively robust liquid Balance Sheet, reducing funding costs, and enhancing operating efficiency and productivity. 2018 was marked by building up liquidity and strengthening capital adequacy as well as managing Balance Sheet risk -after 5 years of forceful growth- while maintaining profitability and cost efficiencies.

Technology highlights include the Your Bank Online system, MKB Business, and Foreign Exchange Control Dashboard.

Avdeev’s Rossium, a domestic group with interests in agriculture, timber, oil and a pharmacy chain, is the majority shareholder (56%) while the EBRD holds a position which reduces the float (18%). The supervisory board contains 5 out of 10 independent non executives while 2 more are nominees of minority shareholders. Related party lending is 3.5% of the loan book. Rosneft exposure though represents a caveat to CBM and to the system in general though some view this more of a strength.

CBM trades below Book Value, lies on a low Mkt Cap./Deposits rating of 13%, below the global and EM median, and commands an Earnings Yield of 13%. A quintile 1 PH Score™ of 8.0 captures the valuation dynamic while metric change is satisfactory. Combining franchise valuation, technical momentum, and the PH Score™, CBM stands in the top quintile of opportunity globally.

 

2. Rides War Has Shifted To Share of Wallet

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Grab is not just challenging the usual passengers-ride and taxi market; it has upped its game by selling monthly subscription plans, which can build recurring users. It is also looking to take bigger slices of business trips, traditionally the more lucrative pie for local taxi companies and niche car rental companies.

This report explains why Grab has gone into this promotional strategy, and is divided into five parts:

1. Monthly Subscription Plans 

2. Better Allocation of Resources 

3. The Juicy Corporate Pie

4. Fare comparison between Grab, Go-Jek, CD

5. Conclusions

3. Indonesian Telcos: Mobile Pricing Should Continue to Recover. Telkom Remains Our Top Pick

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Over the past three years, an aggressive price war has pushed Indonesian data prices down 80% to unsustainable levels. With the exception of India, and Jio’s moves there, Indonesia now has the cheapest data in markets we track globally. However, there have been signs recently of tariff stability, with Telkomsel’s tariff rising 7%. Investors’ main concern, and the key risk to being bullish on the sector in Indonesia, is the risk a price war breaks out again. We think that is unlikely. The smaller telcos are not making sufficient returns to cover capex and finance costs and market share gains alone will not save them. Something needs to give: either prices rise and/or smaller players consolidate. Rumors swirling around Indosat (ISAT IJ) in recent days suggest consolidation may be under consideration again. 

Our view is that the price cycle has turned in Indonesia and consolidation is likely. That underpins our positive view on Indonesian telcos. We look for Telkom Indonesia (TLKM IJ) to deliver strong growth from its two major engines: mobile through Telkomsel and fixed line (broadband). The stock has done reasonably well since mid-2018, but we see upside and rate the shares a Buy with a raised target price of IDR5,250. We continue to like the re-rating story at XL Axiata (EXCL IJ), and remain Buyers with a price target of IDR5,200. Indosat’s share price has soared in recent days and we have now cut the stock to a Sell with the target price retained at IDR2,040.

4. Z IN

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In spite of a stellar quarter (Q3 FY19), we remain cautious on Zee Entertainment Enterprises (Z IN) and the prospects of broadcasters in India. Hindi GEC is consolidating, and most of the growth is likely to happen in regional channels which remain competitive. Global data suggests ad spends as a % of revenue for many broadcasters and cable operators has been disrupted and couple of year’s down the line, India should be no exception. Contrary to consensus, driven by millennials and non-affordability of second television, cord cutting in India could accelerate sooner than excepted. With an hyper competitive OTT landscape, uncertainty post TRAI Tariff implementations, in an industry suspect to easy value migration, the long term outlook for Zee Entertainment Enterprises (Z IN) and the broadcast Industry warrants attention. The only near term positive for the stock is the potential stake sale to a strategic partner, which is likely to keep the stock price buoyant but only in the near term.

5. TSMC. Reiterating Our Bullish Stance After Earnings

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While Taiwan Semiconductor Manufacturing Company‘s Q4 2018 earnings were in line with expectations at ~$9.4 billion, the company’s revenue forecast for Q1 2019 was down 22% sequentially to $7.3 billion. TSMC predicts a tepid 2019 with semiconductor growth of 1%, down from ~6% last year. Like many of its peers, TSMC sees challenges relating to inventory overhang, waning smartphone unit sales and global macro uncertainty weighing on the company in the first half and expects business to recover to modest growth in the second half. The bottom line is that the company anticipates a no-to-low growth year of the Pig. 

In spite of the downbeat outlook for the year, the company reiterated its belief that it will hit its 5-10% growth CAGR through 2021. To meet that goal, it is clear that TSMC now expects both 2020 and 2021 to be double digit growth years and, as we outlined in our SmartKarma Originals report A Bull Investment Case for TSMC (In-Depth Version), much of that growth will come from TSMC’s new-found markets for processors and AI acceleration in the data center.

From a process technology leadership perspective, a fundamental tenet of our bull case for the company, TSMC noted that its 7nm process accounted for a staggering 23% of revenues in the fourth quarter, 7nm+ (with EUV) is on track for volume ramp in the second quarter and 5nm remains on track to follow just one year later. 

Investors shrugged of the negative outlook for the year with the company’s share price barely registering the news. We reiterate our bullish stance on the stock and our growth CAGR of 8.36% through 2022.

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