In this briefing:
- Horiba (6856 JP): Bad News Largely Discounted
- FBN Holdings: A Contrarian Call from Behind the Hydrocarbon Clouds and Shadows
- CKP (CKP TB): Powerful Expansion to Drive Earnings Growth
- Company Visits: The Best of November/December 2018
- Islami Bank Bangladesh: Cheap in a Risky Sector
1. Horiba (6856 JP): Bad News Largely Discounted
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%.
2. FBN Holdings: A Contrarian Call from Behind the Hydrocarbon Clouds and Shadows
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.
3. CKP (CKP TB): Powerful Expansion to Drive Earnings Growth
- 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
* Consensus Estimates
4. 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.
5. 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.
