In this briefing:
- Lloyds Banking Group (LLOY LN): Growth Who Needs It?
- Credit Bank of Moscow: A Highly Ranked EM Opportunity
- Keppel-KBS US REIT – Positioned for Defensive Growth. Still Attractively Priced.
- AFFIN Bank: To Affinity and Beyond
- China Meidong (1268 HK): Standout Story in Gloomy Auto Dealership Sector; Luxury Brands Outperform
1. Lloyds Banking Group (LLOY LN): Growth Who Needs It?
The political decision to exit the European Union has unpredictable negative consequences for both the UK economy and stockmarket. My purpose is to identify a portfolio of UK shorts and occasional longs.
Lloyds Banking: What does it do ?
Lloyds Banking Group is the UK’s largest retail bank with a 20% share of both consumer credit and mortgage lending. It has no investment banking activities or overseas activities.
Why is it in the long portfolio ?
After a 10 year period of rehabilitation post the Financial Crisis the group is now profitable at the statutory level and generating a healthy double return on tangible equity (ROE). This year the consensus expectation is for a dividend of 3.3p per share (+7%) leaving the shares on a yield of 5.7%. In addition management completed a GBP1bn share buyback, the combination of buy-back and divided represents 4.7p per share or an effective yield of 8.1%. If future projections prove correct then the ROE should morph into the mid-teens by 2020. A return at this level should be sufficient to lift the shares well above book value.
What are the risks ?
A key risk is economic dislocation from Brexit. Management believe that EU exit along the lines of the current withdrawal agreement will be compatible with only a marginal increase in credit losses.
2. Credit Bank of Moscow: A Highly Ranked EM Opportunity
Founded in 1992 and acquired by Mr. Roman Avdeev in 1994,Credit Bank Of Moscow Pjsc (CBOM RM) benefits from an entrenched market position and strong brand recognition in its strategic market of Moscow which represents 25% of Russian GDP. CBM is an established operation in Moscow and the Moscow region with over 7,000 devices in high traffic locations.
CBM has expanded fast, from commanding a mere 0.7% share of system Assets in 2013 to 2.9% today.
The bank has a defined strategy underpinned by blue-chip, large, and medium-sized corporate services (fees, settlements, cash handling); high-margin consumer lending; and investment banking (SOVA Capital synergies, interbank, ECM, DCM, M&A). CBM commands a client-base of 15k corporates: companies represent 87% of loans. The bank has 1.5MM retail customers: accounting for a third of deposits.
In 2015 CBM acquired Inkakhran, swelling its nationwide cash handling market share to 17%. In this segment, CBM commands a client-base of 3k, of which 164 are banks, with 876 armoured vehicles covering 33k collection points.
Management is focused on above-system growth, based on a relatively robust liquid Balance Sheet, reducing funding costs, and enhancing operating efficiency and productivity. 2018 was marked by building up liquidity and strengthening capital adequacy as well as managing Balance Sheet risk -after 5 years of forceful growth- while maintaining profitability and cost efficiencies.
Technology highlights include the Your Bank Online system, MKB Business, and Foreign Exchange Control Dashboard.
Avdeev’s Rossium, a domestic group with interests in agriculture, timber, oil and a pharmacy chain, is the majority shareholder (56%) while the EBRD holds a position which reduces the float (18%). The supervisory board contains 5 out of 10 independent non executives while 2 more are nominees of minority shareholders. Related party lending is 3.5% of the loan book. Rosneft exposure though represents a caveat to CBM and to the system in general though some view this more of a strength.
CBM trades below Book Value, lies on a low Mkt Cap./Deposits rating of 13%, below the global and EM median, and commands an Earnings Yield of 13%. A quintile 1 PH Score™ of 8.0 captures the valuation dynamic while metric change is satisfactory. Combining franchise valuation, technical momentum, and the PH Score™, CBM stands in the top quintile of opportunity globally.
3. Keppel-KBS US REIT – Positioned for Defensive Growth. Still Attractively Priced.
Keppel-Kbs Us Reit (KORE SP) (“KORE”) announced its full-year results this evening.
Income available for distribution to Unitholders was 8.6% higher than the IPO forecast. The outperformance was due to contribution from the Westpark Portfolio which was acquired on 30th Nov 2018. Excluding the impact of Westpark Portfolio, income from the underlying IPO portfolio was generally in line with the forecast.
For the full year, total income available for distribution to Unitholders was US$43.8 mil.
KORE reiterated that the US tax regulation changes and convergence of Barbados tax rates for domestic and international companies are not expected to have any material impact on NTA and DPU. There will be no further changes expected to the trust structure.
The outlook for KORE remains positive. KORE has positioned itself well for defensive growth in the coming year.
Positive set of results and outlook is expected to continue driving the re-rating of KORE. The immediate price target for KORE is US$0.78 per unit (parity to NAV) that will translate to a forward yield of 7.3%.
4. AFFIN Bank: To Affinity and Beyond
Based in Malaysia, AFFIN Bank Bhd (ABANK MK) is the product of two mergers over the last decade. Today AFFIN is a small-medium-sized financial services group, with 107 branches, combining corporate and SME banking; consumer banking (remittance services, vehicle loans, mortgages, personal loans, credit cards, unit trusts, and bancassurance products); Investment/Merchant Banking via AFFIN Hwang (AHAM), including corporate finance, capital market services and investment management; plus underwriting of general and life insurance (an underpenetrated market) through AAGI and AALI. AFFIN Islamic is a wholly owned subsidiary.
The core shareholders are LTAT (the superannuation fund for the Armed Forces), the Bank of East Asia, and Boustead Holdings which limits the float.
Malaysia has a tailwind of a new administration, vowing to overturn many aspects of its predecessor – including cancelling mega infra projects and reducing the “real” National debt.
The economy is pretty buoyant and is slated to generate an average of 4.75% GDP growth over 2018-2022. Inflation has mellowed, supported by the cut in GST, but will still, once these effects diminish, be modest, at around 2%, this year. The current and trade accounts are in surplus.
Malaysia, however, has a high level (by Asian standards) of household (excluding mortgages) indebtedness, dominated by credit cards, auto/vehicle finance, and personal loans. This had led to a moderately high risk in terms of the credit-to-GDP gap. The corporate sector is not excessively leveraged.
AFFIN trades at a P/B ratio of 0.5x and a Mkt Cap./Deposits of 8%, well below the global and EM medians. Earnings Yield lies at 13.3%. The limited float will have a bearing on the valuation. A quintile 1 PH Score™ of 7.9 captures above-average metric change (though not in asset quality and efficiency) and value-quality attributes. Combining technical momentum, franchise valuation, and the PH Score™, the overall ranking stands in the top decile globally. A RSI of 43 points to potential upside.
5. China Meidong (1268 HK): Standout Story in Gloomy Auto Dealership Sector; Luxury Brands Outperform
China Meidong Auto (1268 HK) has been on a rollercoaster ride in 2018. The stock price of Meidong started 2018 around 2.7 HKD and recently has been trading around 2.9 HKD.
Nice and steady ride? Not exactly, as it has swung from 4.3 HKD in June to 2.6 HKD in August. After analyzing how NPAT estimates evolved over the past year there should be no justifications for these wild swings.
Meidong is likely to report solid FY18 results by late March vs industry peers which are expected to report a weak 2H18. While BMW dealers have been reportedly suffering in China during 2018, Meidong was fortunate to have other luxury brands pick up the slack.
FY19 should be another growth year for Meidong as 1) recently acquired BMW showrooms contribute their maiden results and 2) other luxury brands continue to perform despite overall doom and gloom in the Chinese auto market. Should the Chinese government launch car replacement stimulus measures this would be icing on the cake.
Fair Value lowered slightly from 4.7 HKD to 4.4 HKD (10x 2019E) on lower 2019 profit estimates, which leaves 52% upside excluding dividends.
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