In this briefing:
- TRACKING TRAFFIC/Containers & Air Cargo: December Box Rates & Volume Firm
- SK Hynix: Attractive at Current Level
- 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.
1. TRACKING TRAFFIC/Containers & Air Cargo: December Box Rates & Volume Firm
Tracking Traffic/Containers & Air Cargo is the hub for all of our research on container shipping and air cargo, featuring analysis of monthly industry data, notes from our conversations with industry participants, and links to recent company and thematic pieces.
Tracking Traffic/Containers & Air Cargo aims to highlight changes to existing trends, relationships, and views affecting the leading Asian companies in these two sectors. This month’s note includes data from about twenty different sources.
In this issue readers will find:
- An analysis of December container shipping rates: Our proprietary index suggests average container shipping rates firmed again in December. Firmer rates in Q418, combined with a moderation in fuel prices, probably lifted carrier margins in the period, and this improvement is likely to spill over into Q119.
- A look at December air cargo activity, which slumped, again: The five Asia-based airlines we track reported a ~2% Y/Y decline in air cargo handled. After growing by a healthy +6.3% Y/Y in H118, air cargo demand at these five carriers has shown a consistent monthly decline, growing by just 1% in Q418 and shrinking slightly in November and December.
- For container carriers and airlines, fuel price increases have continued to moderate. As of mid-January, the price of bunker fuel was up just 4% Y/Y, and the price of jet fuel had declined by around 7%. Throughout much of 2018, fuel prices had risen 20-40% Y/Y, or more.
- Japanese carriers’ December quarter earnings on the horizon: We will soon find out whether improving conditions in container shipping showed up in the carriers’ P&Ls, as the three major Japanese shipping companies are set to report December quarter results at the break on January 31.
Although slowing demand growth is unlikely to generate impressive top-line improvements, firmer pricing combined with lower fuel costs should support an ongoing improvement in profitability for container carriers in the near-term. Meanwhile, the slump in air cargo demand has not yet hit air cargo yields, but it’s becoming clearer that an economic slowdown is hurting demand for this relatively expensive mode of transport.
2. SK Hynix: Attractive at Current Level
Multiple news article mentioned SK Hynix’ weak Q4 2018 numbers due to the slowdown in the smartphone markets but the fact remains that:
- smartphone is the dominant communication tools
- smartphone penetration still has room to grow
- current model of smartphone is likely to remain the same for the next foreseeable future
- lower end smartphones will likely be the next growth driver
In this report we will discuss the following:
Q4 2018 result
Price action in 2018
Margin comparison with the peers
Exposure to the growing affordable smartphone segment
3. 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.
4. 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.
5. 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%.
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