In this briefing:
- Geely: Worst Case Priced In, Waiting for Sector Headwinds to Abate
- IPS Securex (IPSS SP): Micro-Cap Could Benefit from SG Gov’t HDB Upgrade Program
- Siauliu Bankas: A Baltic Belter
- Banco Guayaquil: Off Radar but Surging Higher
1. Geely: Worst Case Priced In, Waiting for Sector Headwinds to Abate
Geely announced its Dec 2018 car sales volume at 93,333 units (down 39% yoy) and its FY2018 sales volume at 1.5mn units, 6% lower than our estimate of 1.59mn units.
Meanwhile management sets its FY2019 sales target at 1.51mn units, which surprised the market as the market consensus stood at around 1.8mn units. The stock price corrected by 11.3% on Jan 8th, right after the announcement.
In our view, it is reasonable for the management to give a cautious guidance for 2019E. After all, 2019E China’s auto sales volume might drop by 8% yoy.( China Auto Outlook 2019 – Keep Warm, Winter Is Here! )
However, would Geely’s aggressive new model launches sales offset the weak demand on existing models in 2019E? If not how bad it could be? In this report, we have done a scenario analysis. Our analysis shows that the possibility that Geely missing its 2019E guidance is low. Even assuming our worst case scenario, the stock would be at 7.1x P/E and no medium term downside from current levels.
2. IPS Securex (IPSS SP): Micro-Cap Could Benefit from SG Gov’t HDB Upgrade Program
Since its founding in 1960 the Housing Development Board (HDB) has constructed over 1.1 million dwelling units across Singapore. Currently, over 80% of the Singapore population lives in HDB built housing. With the bulk of these buildings having been constructed between 1960-1988 many of them are up for extensive renewal and renovation works. Construction companies should benefit from this trend, as should the micro-cap Ips Securex Holdings (IPSS SP), a reseller of equipment that modifies HDBs with emergency monitoring systems for senior citizens.
Outgoing PM Lee Hsien Loong (LHL) was very outspoken about the need to upgrade HDBs and make them safer for many of SG’s “pioneers” and senior citizens during his speech at the 2018 National Day Parade (NDP). With a general election coming later this year (date TBC) investors in IPS can be hopeful that the company should be awarded some new contracts and finally end the three-year de-rating which has taken the stock from 0.32 SGD in December 2015 to 0.055 SGD recently.
IPS is cheap with a market cap of only 27M SGD (20M USD) but can only start to re-rate on new major contract announcements.
3. Siauliu Bankas: A Baltic Belter
Formed in 1992, Siauliu Bankas AB (SAB1L LH) has evolved into the sixth largest Lithuanian bank in terms of Assets and an important provider of banking services to Lithuanian SMEs. SAB1L is based in Siauliai in the north of the country, and in recent years has developed a nationwide franchise. It now has an upgraded network of 43 branches in all regions of Lithuania, and is investing in its digital footprint. SAB1L holds a 9.3% share of the corporate credit market, a 8.7% share of system deposits, and 8.7% of fast-evolving consumer loans. Main peers are SEB, Luminar, and Swedbank.
The bank is generating vibrant non-interest income from settlements and cash office transactions as well as its niche home and multi-apartment improvement revenue stream. The banks commands a 60% share of this energy-efficient focused market.
Constant uncertainty regarding an EBRD loan and conversion terms/dilution has weighed on shares for some time. This has since cleared. EBRD is now the main shareholder with a 26% stake after a 2013 subordinated loan was recently converted into equity. The decision to strengthen the bank’s capital not only shows that the largest shareholder has a positive view of the bank’s strategy and outlook, but creates conditions for the bank to continue expanding its activities.
The Lithuanian economy represents a relatively solid narrative. Fiscal discipline combines with growth spurred by consumption, credit, firm investment, exports, while inflation and unemployment remain under control. Industrial output soared in October, propped up by a rebound in manufacturing production. In addition, exports climbed in October while upbeat retail sales pointed to strong household consumption. GDP can grow by 2.5-3.0% over the next year barring any unforeseen global ruptures.
SAB1L stands out trading at a 8% discount to Book Value and lies on a low Mkt Cap./Deposits rating of 12%, well below the global and EM median. SAB1L commands a huge dividend-adjusted PEG of >4x with recurring growth more than 4x its lowly PER. Earnings Yield is 23%. A quintile 1 PH Score™ of 8.9 captures the valuation dynamic while metric change is impressive. Combining franchise valuation and PH Score™, SAL1L stands in the top decile of opportunity globally. With a ROE in excess of 20%, an Efficiency Ratio below 40%, and double-digit B/S growth, shares should command a much higher multiple. With dilution issues regarding an ERBD behind it, shares can move higher.
4. Banco Guayaquil: Off Radar but Surging Higher
Banco Guayaquil SA (GYL ED) commands Ecuador’s most extensive network of 5,732 points of sale, incorporating branches, ATMs, neighbourhood units, as well as a virtual mobile bank, plus telephone and mobile banking. The bank commands 10.5% and 10.3% of the system credit and deposit markets.
Contrary to perception, Ecuador’s financial system appears relatively sound. It is well-capitalised, with solid credit quality, and high levels of liquidity. Private credit is still growing quite robustly. The supervision of the cooperatives should be strengthened though this is not a systemic risk. Removing barriers to financial intermediation, enhancing risk management, and improving oversight and contingency planning could help fortify the system further.
Ecuador’s economy though remains fragile and speculative. The administration of Lenin Moreno cannot be faulted for not grappling with some of the main issues confronting the country after years of chronic mismanagement by Correa. While growth still remains moderate, limited by structural bottlenecks, inflation and unemployment are under control though the fiscal deficit, debt burden, and paltry reserves represent huge challenges, not aided by recent oil sell-off. For this reason, CDS is sky-high – at similar levels to Argentina at 750bps.
But unlike Argentina, deep value can be found in Ecuador’s Banking Sector. At least investors are compensated, in great part, for country risk unlike elsewhere.
And, arguably, the time to buy oil-related proxies is when the commodity price is low, not high.
GYSE shares went on a tear in 2018, not even halted by oil volatility at Q3. But there could be more to come as they are moving off extremely depressed levels. Shares still trade at a 65% discount to Book Value and lie on a low Mkt Cap./Deposits rating of 5%, far below the global and EM median. GYSE commands a dividend-adjusted PEG of 9x. Earnings and Dividend Yields stand at 34% and 18%. A quintile 1 PH Score™ of 10 captures the valuation dynamic while metric change is impressive. Combining franchise valuation and PH Score™, GYSE stands in the top decile of opportunity globally though we are mindful of country risk and interrelated oil volatility.
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