In this briefing:
- Islami Bank Bangladesh: Cheap in a Risky Sector
- Bank St Petersburg: A Christmas Cracker of Value
- NTT Buybacks Will Roll On
- Chinese Telecoms: Recent Meetings Suggest a Benign Capex Outlook, but There Are Risks over 5G.
- Taisho Frontrunner to Acquire BMS’s French OTC Business
1. 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.
2. 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.
3. NTT Buybacks Will Roll On
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.
4. Chinese Telecoms: Recent Meetings Suggest a Benign Capex Outlook, but There Are Risks over 5G.
At recent meetings with the Chinese operators and China Tower (788 HK), Alastair Jones came away convinced the operators were not looking at a massive 5G capex burst in 2019. However, Alastair also worries that in the end, the decision is not made by the operators but with an eye to larger policy issues. With Huawei/ZTE under pressure and the China/US trade was simmering the risks to capex have increased. That said, we do not expect large scale 5G capex in 1H19 and with capacity utilization of the networks low their may even be room for further capex declines. We look for more details of 5G plans to be released in 1Q19.
5. Taisho Frontrunner to Acquire BMS’s French OTC Business
Event – Bristol Myers Squibb Co (BMY US)‘s French OTC business UPSA has been on the block since June 2018. According to a December 17, 2018 Bloomberg report (link), Taisho has emerged as the frontrunner to acquire UPSA for ~$1.6b
Our Take
- If Taisho Pharmaceutical Holdin (4581 JP) indeed goes ahead, it would get access to UPSA’s established (matured) OTC business, which generated ~$480m in sales in FY17
- UPSC’s key OTC brands include Aspirine, Dafalgan and Efferalgan pain relievers; Donormyl sleep aid; and Fervex cold and flu remedies
- Taisho also gains a foothold in France, contributing ~60% of UPSA sales (the rest is from other EU countries and China), by leveraging UPSA’s production facilities and distribution channels to perhaps market some of its own OTC products
Valuation
Preliminary analysis suggests that the potential acquisition would have only a marginal impact on Taisho’s financials in the short to medium term due to:
- Acquisition of a matured OTC portfolio that is projected to decline by 3-5% per year
- Absence of cost synergies; Taisho’s SG&A expense to increase by ~¥12-15b from FY19e
- Post deal Cash and Eq. of ~ $1b (assuming UPSA is an all cash deal)
Net, net we would maintain our EW rating and Fair Value estimate of ¥11,300 / share.
