In this briefing:
- Tokyo Kiraboshi Financial Group (7173 JP): All That Glitters Is Neither Gold Nor Star Quality
- Sumber Alfaria Trijaya (AMRT IJ) – Flying off the Shelves – On the Ground in J-Town
- Mitsubishi Selling off Stake in Aeon, Ministop in Limbo
- Saigon Hanoi Commercial: A Forsaken Franchise
- Shin Kong Financial: Bargain or Value Trap?
1. Tokyo Kiraboshi Financial Group (7173 JP): All That Glitters Is Neither Gold Nor Star Quality
Since our bearish Insight on Tokyo Kiraboshi Financial Group (7173 JP) issued in November 2018, Tokyo Kiraboshi FG (7173 JP): Shooting Star, the stock’s subsequent performance has fully justified our pessimism, with the share price finishing CY2018 down 47.7% year-on-year (YoY). Having touched a low of ¥1,504 on Christmas Day, the shares have recovered 10.1% to ¥1,656 as of Friday’s close: slightly better than the Topix Bank Index, which closed on Friday at 154.44, up 9.0% over the same period. Trading on a forward-looking price/earnings multiple of 12.5x (using the bank’s current FY3/2019 guidance) and a price/book ratio of 0.21x, TKFG looks cheap. This is deceptive. Adjusting the group’s earnings per share (EPS) for the ¥55 billion (US$507 million) in two still-outstanding preference share issues pushes the PER to over 18x: hardly a bargain. Meanwhile, the group’s RoA and RoE ratios are woefully low, loan growth has collapsed since end-March 2018, deposits have fallen alarmingly, and main bank subsidiary Kiraboshi Bank is struggling to keep its net return on funds deployed (NRFD) in positive territory. A stock best avoided.
2. Sumber Alfaria Trijaya (AMRT IJ) – Flying off the Shelves – On the Ground in J-Town
Leading Indonesian mini-mart operator Sumber Alfaria Trijaya Tbk P (AMRT IJ) (Alfamart) has undergone quite a dramatic transformation over the past 12 months, with a dramatic slowdown in its new store buildout paving the way for a significant pick up in SSSG and a reduction in debt.
The company plans to start to step up its store openings selectively over the next year, with 500 new stores planned and fewer closures. Last year it only opened net 200 new stores having opened 1200 stores the previous year.
The market segment continues to see consolidation, with supermarkets and hypermarts suffering and mini-markets continuing to gain ground as the “pantry of the middle-class”.
The company continues to grow its fee-income business, which is highly profitable, with increasing collaboration with utilities, finance companies, and e-commerce players to name but a few.
After a difficult 2017, Sumber Alfaria Trijaya Tbk P (AMRT IJ) looks to be well and truly back on a growth trajectory, with a rationalisation of its stores, a slow down in its expansion, reduced gearing, and a focus on operational efficiencies. The Mini-market continues to win out in the retail space and is increasingly being used as a distribution network for e-commerce companies. The growth in fee-service from bill payment and other services will be positive for the bottom line. The stock is by no means cheap on a PE basis but provides quite unique exposure to what is still a high-growth area of the economy. According to Capital IQ consensus estimates, the company trades on 51x FY19E PER and 44x FY20E PER, with forecast EPS growth of +30% and +16% for FY19E and FY20E respectively.
3. Mitsubishi Selling off Stake in Aeon, Ministop in Limbo
Mitsubishi has finally given up its hope of convincing Aeon to merge Ministop (9946 JP) with Lawson and is selling its stake in the largest retail group.
There will be no change to the extensive supply relationship between the two companies and Mitsubishi’s food wholesale arm, Mitsubishi Shokuhin (7451 JP).
While Aeon seems to have spurned Mitsubishi for now, it is hard to see how Aeon will progress in the convenience store sector without Mitsubishi’s help. In the short-term Ministop looks like a poor investment but Aeon may have to sell to Mitsubishi eventually and will want a good price for it.
4. Saigon Hanoi Commercial: A Forsaken Franchise
Value-quality trends at Saigon Hanoi Commericial (SHB VN) stand out within Vietnam’s improving banking universe. Key metrics/signals at 9M18 underline positive fundamental momentum embodied in a high PH Score™. SHB’s improvements reflect macro backdrop (upgraded sovereign strength).
Formerly known as Nhon Ai Rural Commercial, SHB incorporated Hanoi Building Commercial Bank and Vinaconex – Viettel Finance in 2012 and 2017, respectively, in line with system restructuring. SHB borrows short in order to lend short and long as well as purchase high-yielding government bonds. More than 79% of loans stem from credit provision up to 1 month and from 1-3 months, broadly matching short-duration market funding. (The liquidity gap is sound). Credit is diverse with an emphasis on agriculture, manufacturing and wholesale and retail trade. SHB is increasing higher-margin consumer lending which represents just 22% of the loan portfolio. Some 8% of the portfolio relates to state-owned enterprises.
Vietnam exhibits broad-based, mild-inflationary, growth. Reforms continue in the banking sector, privatisations and reducing red tape. However, economic distortions and capacity constraints remain, as do external and domestic risks and longer-term challenges. The robust economy though provides an opportunity for additional reforms to boost investment, ensure durable growth and resilient balance sheets, and reduce the external surplus.
Regarding banks, SOCBs need to be capitalized with government funds, and private sector and foreign ownership limits raised (lifting a 30% foreign investor limit to banking and aviation is underway). Vietnam needs to develop a macroprudential framework and to enhance data quality on balance sheet exposures to better monitor and manage risks, and to ensure that robust liquidity and crisis management frameworks are in place from a legal and operational perspective in order to mitigate financial sector risks. The broad picture though reflects an improved macro profile combined with progress at banks in writing off legacy problem assets and boosting capitalisation – especially in the case of ABB, ACB, Military Bank, OCB, TPbank, VIB, and Techcombank. However, Sacombank faces a significant risk from its problem assets while VP is constrained by risk from its consumer finance portfolio.
Shares of SHB trade on an earnings yield of 20%, a P/B of 0.5x, and a franchise value of 4% with the tailwinds of a quintile 1 PH Score™. A RSI of 39 intimates that shares are under bought. Shares have had a poor run of late (no doubt reflecting caveats mentioned below) and may have found a bottom. Caveats include modest solvency (similar to Sacombank, MCB, Lien Viet, BIDV, Vietcombank, Vietinbank), a model reliance on market funding as opposed to CASA, soft loan growth, slow fee income revenues, and inefficiencies within its operations in the northern zone of Vietnam.
5. Shin Kong Financial: Bargain or Value Trap?
Analysing Shin Kong Financial Holding (2888 TT)is like evaluating an investment trust with operating cash flow and a robust demand deposit funding base derived from 106 bank branches. The consolidated asset-base (68% of which consists of securities) is a float (long for claim reserves and short for premium reserves) composed of low beta high dividend yielding stocks but mainly overseas FI, some NT$1.7trillion worth yielding 4.7%, as well as loans (20% of Assets).
SKFH is the holding for life insurance (SKL), the bank (SKB), property insurance, mainly auto and fire insurance (SKPIA), the investment trust (SKIT), Masterlink securities, and VC operations (SKVC). SKFH is mainly life insurance (73% of Assets) and the bank (24%).
Management is focused on enhancing integration initiatives, efficiencies, initiatives and synergies within the Group. “Shin Kong: Pioneering a digital mobile future” is a programme to drive digital evolution through AI, big data, and smart robots.
With 317 branches, the secure and mature insurance franchise (mainly life but also health) is concentrated on selling foreign FX protection and policies in order to support interest spreads and contain hedging costs. While Net Profit at the life insurance subsidiary jumped exuberantly at 9M18, there were signs of deterioration in the underlying underwriting business with the claims: premium plus expenses: premium ratios eroding somewhat which shows up in the Consolidated statement in a decrease in “Net Income on Life Insurance”.
The bank is scaling up its presence in wealth management (bancassurance, mutual funds), trade finance, syndicated loans, and retail plus SME credit. Fee income is now 20% of total Revenues. A negative take, as elsewhere, was the rise in interest expenses after Fed tightening though this helps improve returns from life insurers’ assets, which have a shorter duration than their insurance liabilities. However, value-quality trends at SKB (the bank) are positive. Key metrics/signals at 9M18 in consolidated accounts and separate bank statements underline positive fundamental momentum embodied in a high PH Score™.
Consolidated results perhaps better reflect earnings pressures in insurance than the life insurance Balance Sheet as well as showing gains from FX and the sale of investments across divisions and a solid banking performance despite aforementioned interest expenses growth.
Shares of SKFH trade on an earnings yield of 21%, a P/B of 0.57x, a franchise value of 15%, and a Dividend Yield of 4% with the tailwinds of a decile 1 PH Score™. A RSI of 36 intimates that shares are under bought. Shares have had a poor run of late with the P/B at a 3-year low, and may have found a bottom. Caveats include underlying insurance results, the tough underwriting environment, and scale and interest costs within the banking franchise. The jury is out as to whether SKFH might be a value trap.
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