Brief Thailand: Krung Thai Bank: Not as Cheap as It Looks and more

In this briefing:

1. Krung Thai Bank: Not as Cheap as It Looks
2. TTW: Cut 2019-2023 Earnings on the Rise of Depreciation Expenses
3. Snippets #20: Dark Clouds in Thai Equities

1. Krung Thai Bank: Not as Cheap as It Looks

Originally, Krung Thai Bank Pub (KTB TB) struck us as interesting. A solid PH Score™, reasonable franchise valuation and P/Book, and a low RSI.

However, further due-diligence shows a somewhat stagnant and eroding operation.

• Headline profitability improvement is unrelated to efficiency or to operational advances.
• Cost growth is fast outpacing a declining top-line.
• Interest income has actually fallen for each of the last 3 years.
• The bank is being squeezed on margin despite keeping interest expenses unchanged.
• Non-interest expenses soared by 26% YoY.
• The bottom line (and profitability) was flattered by varied low quality items as well as much lower loan loss provisions, but still remained well above comprehensive income.
• Asset Quality is also concerning (despite lower loan loss provisions) given the sharp rise in loss (especially) and substandard loans as well as the amount of Special Mention Loans on the Balance Sheet. This means provisioning of problem loans may not be sufficient.
• Liquidity: Deposits are also declining, pushing up the LDR.

2. TTW: Cut 2019-2023 Earnings on the Rise of Depreciation Expenses

We maintain our positive view toward its long-term outlook on the backs of potential growth from its location and secured contract with government agency. Maintain a BUY rating with a new target price of Bt16.8 (SOTP).

The story:

• We cut our 2019-2021 earnings forecast by 12-13% to factor in rising depreciation expenses caused by its shortening depreciated years of PTW’s assets.
• Our new target price of Bt16.8 is derived from Some-of-the-parts (SOTP) which comprises (1) Bt13.8 from core business (tap water supply under both TTW and PTW) based on DCF(6.7%WACC, 0%TG) and (2) Bt3.0 from CKP based on IFA report.

3. Snippets #20: Dark Clouds in Thai Equities

Of the five interesting trends/events/developments we heard this month, we highlighted five and how they could impact Thai equities in the near term:

• Thai Raksa Chart Party dissolution. The dissolution of the TRC, the second largest Thaksinite party, poses some political risks but could affect sentiments for companies founded by Thaksin, such as Intuch and AIS.
• Thai Air Asia says no to Nok Air. After the briefest considerations, the larger airline came to the conclusion that they wouldn’t acquire a stake in struggling Nok Air.
• Capital Gains Taxes are currently under consideration by the government for the first time. If implemented, they are likely to have negative impact on overall equities but the brokers in particular.
• From LINE to BEC. LINE (Thailand)’s Country Manager Ariya Phanomyong has agreed to move to BEC. Though mildly positive, we believe improvements will revolve around distribution rather than the more key issue of content.
• True Move’s Request for 5G delay may sound odd at first glance, but we see it as a rational, if not very tactful, way of delaying a new round of capex.