Forecasting special dividends
With a loan growth forecast of 4-5% per annum over our forecast period, and a 1.5% discounted dividend re-investment plan (DRP) in place, we believe Bank of Queensland (BOQ) can pay fully franked special dividends up to 8 cents per share (cps) each half-year over our forecast period and still retain enough of a buffer above its interim CET1 target to have the option of accelerating investment spend. Such a scenario should allow BOQ to be compliant with APRA's 'profits test'. However, if statutory profits turn out to be less than our forecasts (particularly due to larger than expected non-cash items) then any half-yearly special dividends may be of a quantum less than 8cps to be compliant with the 'profits test'.
We are conservatively forecasting half-yearly special dividends of 5cps over our forecast period.
Expecting BOQ to optimise distribution of franking credits
The reason we are expecting BOQ to operate a discounted DRP whilst paying special dividends is so that BOQ can distribute more of its surplus franking credit balabce to shareholders. As at the 30/09/2017, the franking credit surplus was A$101m.
Potential for accelerated investment spend
BOQ's annual investment spend in recent times has been approximately $60m. We believe BOQ may look to use 5-10bps of surplus CET1 capital for its digital transformation program; this would equate to $20-$40m of pre-tax spend.
We believe they may take another few months to weigh up this option as it transitions from existing data centres to new data centres managed in a private cloud environment.
Investment view and changes to forecasts
We have reduced our cash earnings per share forecasts by 2.0% in FY18F, 4.0% in FY19F and 5.2% in FY20F as we now expect a 1.5% discounted DRP (with an assumed 35% take-up rate) to operate over our forecast period. We have also lowered our Net Interest Margin forecasts. Also we are now forecasting half-yearly special dividends of 5cps over our forecast period.
While our share price target remains unchanged we have upgraded our recommendation from Hold to Add.
Key downside risks include increased funding costs and greater-than-expected asset quality deterioration.
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