We have re-examined the Kina Securities (KSL) investment thesis, which we see as an earnings driven re-rating story over the next 12-18 months.
FY18 – a turning point for organic growth
In our view, KSL's record FY18 profit (PGK48m) marked an inflection point in the company's organic growth story. With both KSL's Net Interest Margin and cost-to-income ratio having stabilised in recent periods, and FX income now fully restored, we think the earnings benefits of continuing strong loan growth will become more pronounced from here. We note, since listing, KSL has grown both its loan book and net interest income by >100% (27%-33% CAGR respectively), with management targeting an additional >20% business lending growth in FY19.
ANZ acquisition – material accretion with downside protection
On our estimates, the ANZ PNG acquisition (completion expected 3Q19) is ~7% accretive in FY19F and ~20% accretive in FY20F to KSL's Earnings Per Share (post synergies). While integration risks exist, management has said the integration is tracking to schedule thus far. Positively too, we understand disclosed ANZ PNG earnings are conservative with buffers, while the transaction agreement provides KSL with some downside protection on bad debts (e.g. ANZ shares half of any new bad debts emerging from the book in the first 2 years after transfer).
Another leg of growth exists medium term
Medium term we see further clear areas of upside for KSL from additional lending market share gains, improving efficiency and growing FX revenue.
We note the following:
- Since listing, KSL has organically grown its lending market share (LMS) by 5% and will still only have ~10% market share post the ANZ PNG acquisition;
- KSL's elevated cost-to-income (CTI) ratio (54% vs peer BSP's 41%) should normalise as the company exits its current high spend phase; and
- KSL is increasingly competitive in FX (~10% market share) and is looking to further strengthen key exporter relationships, particularly in the resources sector.
Changes for forecasts and risks
We adjust KSL's Earnings Per Share by +2% for FY19F and -2% for FY20F on a broad review of our earnings assumptions. On our forecasts, KSL trades on ~5x FY20F earnings (~2 PE points below regional peers) and a ~12% FY20F dividend yield. KSL continues to rank well against peers on a range of metrics (earnings growth, ROE, NIM and capital levels). Key risks to our recommendation are:
- a deterioration in the PNG economy;
- bad debts;
- ANZ integration risks;
- competition impacting margins; and
- macro-economic risks (e.g. currency risks etc)
We upgrade our share price target and retain our Add recommendation.
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Disclaimer(s): Analyst owns shares.
Analyst has a threshold interest in the financial products referred to in the detailed report. For these purposes, a threshold interest is defined as being a holder of more than $50,000 in value or 1% of the financial products on issue, whichever is the lesser.
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