In this briefing:
- PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter
- Sea Ltd (SE US): Placing Price Leaves Money on the Table
- Politics, Uncertainty and Bad Policy: The Third Wheels of Profits and the Investment Cycle
- Snippets #19: Marijuana, Mergers, and More
- Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story
1. PT Bank Rakyat Indonesia (Persero): Rather Rich for a Bargain Hunter
Bank Rakyat Indonesia Perser (BBRI IJ) seems to be doing a great deal right to perhaps satisfy a punchy valuation.
Profitability is elevated with chunky NIMs and spreads, fee income and insurance are performing well, and OPEX is under control. Capital Adequacy and CIR look healthy.
However, we are concerned about rising interest costs, at a pace in excess of interest income generation.
The bank also seems to be stretching a little in terms of quality income to reach the Net Profit line with “other non-interest interest income” and gains on securities. The bottom line falls a little short of a comprehensive income assessment.
In addition, asset quality remains a thorny issue. The Balance Sheet continues to be much more toxic than the sedate NPL ratio. This relates to the micro focus.
Debt to Equity is on the rise.
Overall, trends are no better than average – as testified by a PH Score of 5.
Trading on a P/Book of 2.6x and an earnings yield of 7.3%, we believe that valuation is somewhat rich irrespective of the bank’s strengths. A franchise valuation of 52% versus a median of 8% in Asia Pacific seals the deal.
2. Sea Ltd (SE US): Placing Price Leaves Money on the Table
Sea Ltd (SE US) announced that it would raise gross proceeds of $1.35 billion after increasing the size of its placement from 50 million to 60 million ADS. The placement is priced at $22.50 per ADS, 6.5% discount to its last close price. Tencent Holdings (700 HK), as well as one of Sea’s directors, are expected to buy 6.3 million ADS in the placement. The placing is expected to close on or about 8 March 2019.
In our previous note, we stated that we would participate in the public offering at or below the last close price of $23. While the share price will initially trade around the placing price, we believe that share price will recover as Sea post-placing fundamentals are now materially stronger.
3. Politics, Uncertainty and Bad Policy: The Third Wheels of Profits and the Investment Cycle
Our positive view of the Asian region in 2018 was not reflected in stock market performance. But now is not the time to discard fundamentals and fundamental analysis. Unlike the US, the Asian region is in the early stages of a profit upcycle. As we have argued on many occasions, that is the building block required to kick start the investment cycle. But theoretical explanations of the growth process aside, is there any empirical support for the argument that profits and investment, and therefore growth, are related? We would answer in the affirmative and, in the following report, we try to show how the process works and where Asia stands on two of our Austrian Stress Indicators (ASIs). Market volatility aside, the conditions for good growth gains are firmly in place in most of the region.
4. Snippets #19: Marijuana, Mergers, and More
Five interesting trends/developments that could impact Thai equities in the recent period:
- Legalization of medicinal marijuana. Thailand legalized medicinal use of marijuana at end of February and has already received immense interest from potential growers. At some point, pharma and healthcare companies could be beneficiaries of this trend.
- Rumbles in the airline industry. Asia Aviation (AAV TB) , parent company of Thai Air Asia, acquires a stake in competitor Nok Air. This is one of the few signs of industry consolidation in this sector.
- MOU signed between TMB and Thanachart. The deal may take longer than initially expected, but the two sides have agreed on some basics such as 70% equity financing and deal size of roughly Bt130-140bn.
- Read-through from US Election 2020. Some of the Democrat policies advocated by candidates in 2020 could turn out to be positive for Asian equities.
- BGrimm acquires Glow SPP1 for a bargain price of Bt3.3bn, or 55% of the expected price, opening the way for the GPSC-Glow merger, potentially the largest deal of 2019.
5. Sea Ltd (SE US): Placement a Good Opportunity to Enter an Attractive Story
Last Friday, Sea Ltd (SE US) unveiled plans to raise around $1 billion (based on the closing price on 28 February) through an underwritten public offering of 50 million ADS. The fundraising was inevitable due to the high cash burn and net cash position.
We are positive on Sea as digital entertainment (Garena), the cash cow, remains in rude health and its newer e-commerce business (Shopee) is a market leader, rapidly growing and reducing its losses. Overall, we would participate in the public offering at or below the last close price of $23.
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