In this briefing:
- BBTN: Indonesia Has Special Mention Problems Too
- Westpac Banking: Looking Fragile
- Tochigi Bank (8550JP): Red Flags but No White Flags (Yet)
- LG Uplus: Risks Now Largely Priced In. Raise to Neutral on CJ Hello Deal Synergies
- Sing Holdings – Surge in Full-Year Earnings with a Surprise Hike in Dividend. 67% Upside. BUY.
1. BBTN: Indonesia Has Special Mention Problems Too
Bank Tabungan Negara Persero (BBTN IJ) appears to have a nasty combination of high Special Mention Loans (SMLs) and elevated “past due but unimpaired Loans”.
The implication is that provisioning levels are insufficient in an environment of eroding asset quality.
But the bank continues to grow credit by around 20% YoY.
The bank is hugely exposed to the retail real estate market (91% of Loans).
In fact, the Indonesian Banking Sector is rife with high SMLs and in some cases elevated “past due but unimpaired Loans”.
SMLs are traditionally associated with Chinese under-reporting of underlying bad loans, and hence the production of a somewhat flattering Asset Quality picture.
Maybe, the health and valuation of the Indonesian Banking Sector needs to be reassessed with implications for IDR.
2. Westpac Banking: Looking Fragile
Westpac Banking (WBC AU) is facing a class action suit regarding alleged irresponsible lending in home loans since 2011. This is the first class action against a major Australian bank since the publication of the royal commission’s final report.
The ramifications of the royal commission report remain a source of debate with elections coming up. But, in general, banks will not be allowed to conduct operations in a “business-as-usual way”. There will be consequences for credit provision.
Westpac’s Balance Sheet looks decidedly fragile as it stands. The bank is entering a slowdown from a position of weakness.
Exposures to Australia’s slowing economy (not unrelated of course to China), the dovish turn at the Central Bank, and in particular its bubbly housing market make us hyper cautious. The highly volatile Aussie dollar tumbled from levels above $0.7200 to below $0.7100 following reports that China banned coal imports from the country at a major port.
Despite the sinking share prices of Australia’s main banks, valuations may still be too high given the varied headwinds.
3. Tochigi Bank (8550JP): Red Flags but No White Flags (Yet)
If one were looking for evidence of the inherent dangers of risk concentration in the banking industry, one need only look to tiny secondary regional bank Tochigi Bank (8550 JP), which reported its earnings for the nine months to end-December 2018 on 31 January 2019. Having made consolidated net profits of ¥1.57 billion in 1H FY3/2019, the bank plunged into the red in 3Q by ¥1.80 billion as a result of losses on disposing of fixed-rate US$-denominated securities. Rather surprisingly, foreign investors own just over 21% of outstanding shares. Tochigi Bank may not be the only small Japanese bank to run into trouble with its foreign securities portfolio in CY2019. Caveat emptor! (May the buyer beware)!
4. LG Uplus: Risks Now Largely Priced In. Raise to Neutral on CJ Hello Deal Synergies
LG Uplus (032640 KS) shares have fallen around 20% from the highs of January when the market was excited by 5G. That always seemed overly optimistic given the lack of viable business cases and unknown investment requirements and we were comfortable with our Sell rating from mid October and KRW15,000 target price. Following weak results, an easing of 5G enthusiasm and the recently announced CJ Hello (037560 KS) deal the share price has fallen to around the KRW15,000. Alastair Jones now thinks a lot of bad news is in the price and the available synergies from CJ Hello offset a weaker earnings outlook.
5. Sing Holdings – Surge in Full-Year Earnings with a Surprise Hike in Dividend. 67% Upside. BUY.
Sing Holdings (SING SP) announced its FY18 full-year results this evening.
Results were largely in line with expectations.
Take-up rate at Parc Botannia improved from 62% in 3Q FY19 to 66% in 4Q FY19. With the biggest agency in Singapore marketing the project, sales at Parc Botannia is expected to pick up in 2019.
A key surprise in Sing Holdings’ FY18 results was the 20% hike in its dividend to 1.2 S-cents per share in FY18.
My fair value for SHL is pegged at S$0.66 per share, implying an upside potential of 67%. I maintain my BUY recommendation on Sing Holdings Ltd.
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