Value Investing

Daily Value Investing: FBN Holdings: A Contrarian Call from Behind the Hydrocarbon Clouds and Shadows and more

In this briefing:

  1. FBN Holdings: A Contrarian Call from Behind the Hydrocarbon Clouds and Shadows
  2. Predicting European High Yield Bond Price Movements
  3. Islami Bank Bangladesh: Cheap in a Risky Sector
  4. Bank St Petersburg: A Christmas Cracker of Value
  5. NTT Buybacks Will Roll On

1. 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.

2. Predicting European High Yield Bond Price Movements

Sk1

The growth and improvement in the liquidity of high yield bond exchange trade funds (ETFs) supports the need for investors to be able to forecast the direction of price moves so they can successfully execute directional trading and risk management strategies.

The purpose of this report is to investigate if a model can be derived using machine learning that can predict the direction of daily moves in the European high yield index using data from the previous trading day.

The data used in the analysis discussed in this report is the daily returns derived from the closing price data of the Bloomberg European high yield index (dependent variable) and the following five independent variables: the 2yr/10yr German government bond yield curve steepness, the European STOXX equity index volatility, the Euro STOXX 600 index, VIX volatility index and the US/EUR FX rate.

This report found that a five factor model using the drivers mentioned above is expected to be a useful forecasting tool in predicting the high yield index price movement 24hrs in advance.

Accordingly, the model proposed in this report should help investors profit from short term trading, both from the long and short side, in the high yield index as well as being able to use the index for managing portfolio risk on a daily basis.

3. 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.

4. Bank St Petersburg: A Christmas Cracker of Value

Bank St Petersburg PJSC (BSPB RM) benefits from an entrenched market position and strong brand recognition in its home market of City of St. Petersburg –represented by sectors such as pharmaceuticals, medical materials, motor vehicles, trailers/semi-trailers, food products, textiles, and rubber /plastic goods- as well as Kaliningrad and Leningrad.  

BSPB’s asset base is a quite diversified. While management focuses on relatively low-risk and hence low-yielding loans to core large corporates and mortgages, the consumer credit segment and autos are a fast-growing area.

Top Russian banks tend to have a technological edge vis-a-vis other EMs. BSPB‘s Internet Bank ( i.bspb.ru) remains one of the best in Russia exhibiting a 25% growth in retail customers to 960k last year. A recent innovation was the launch of a mobile website which was created as part of the integrated environment based on BSPB Mobile banking apps for iOS, Android, and WindowsMobile . The e-banking system is currently used by more than 95% of the corporate customers of BSPB with 99% of payments and FX transactions being made online. BSPB cards support all the cutting-edge mobile payment technologies offered by Apple Pay, Samsung Pay and Android Pay.

A key of BSPB’s strategic plan is to achieve a sustained ROAE of 15%+. The bank also vows to remain among the top 20 Russian banks by assets and to increase transaction revenues by 50% over 2018-20. In order to achieve these goals, management is committed to expand  the low-risk transaction business and  bolster corporate lending by introducing industry expertise and specialisation and a segmental approach  matching customer demand with high quality services and products.

Independent directors make up at least 1/3 of the Supervisory Board.

BSPB stands out trading at a 70% discount to Book Value and lies on a low Mkt Cap./Deposits rating of 6%, far below the global and EM median. BSPB commands a huge dividend-adjusted PEG of 5x with expected growth more than 3x  its PER. Shares yield 3.5%. A quintile 1 PH Score™ of 9.4 captures the valuation dynamic while metric change is satisfactory. Combining franchise valuation and PH Score™, BSPB stands in the top decile of opportunity globally.

5. NTT Buybacks Will Roll On

Screenshot%202018 12 19%20at%202.37.35%20pm

There is an extensive history of writing on the NTT (Nippon Telegraph & Telephone) (9432 JP) family (and indeed Japan telecom sector) buybacks – their modalities and methods, impacts, legal and accounting requirements, competition, push-me-pull-you effect, etc. 

One of the longstanding features of buybacks for NTT is that NTT is subject to the NTT Law which requires (for the moment) that the government hold at least one-third of the shares outstanding in NTT.

Today, the Nikkei carried an article noting that the Japanese government’sFY2019 budget currently being formed proposes a sale of JPY 160bn of shares to help fund any revenue impact from the upcoming consumption tax rate hike from 8% to 10% next October. The article helpfully notes that they plan on selling when NTT is buying back shares.

This news is not unexpected to Smartkarma readers of the ongoing series. And there are implications and read-throughs.