Bank of Ayudhya

Bank of Ayudhya Plc (BAY) \\

Investment thesis
Since we downgraded our BAY rating from BUY to HOLD on September 17, 2012—prompted by GE Capital International Holding Corporation’s (GECIH) announcement that it plans to divest its 33% stake in the bank—its share price has fallen 18% (after surpassing our YE13 target price of Bt36). The share price drop has priced in the risks and makes the stock worthy of a BUY rating again. Our reasoning is as follows: 1) the strongest FY12-13 earnings profile in the sector, 2) scope for profit upside from better lending growth than modeled and 3) an inexpensive valuation—a YE13 PBV of 1.5x against a regional mean of 1.7x. Our YE13 target price remains Bt36.
Strongest earnings growth profile for FY12-14 in sector
We expect BAY to deliver the strongest earnings CAGR in the Bank sector of 45.5% for FY12-14.against a sectoral mean of 28%. The implication is that the bank will be the best profit performer during the period, which could trigger a valuation re-rating. For this year, we forecast bottom-line expansion of 58% YoY to Bt14.6bn.
Scope for earnings upside
BAY’s loan growth hit its FY12 target of 11% by October. As such, its earnings for the year look set to beat our model. Note that the fourth-quarter is normally the best period of the year for retail lending. We currently forecast that BAY will deliver FY12 and FY13 loan growth of 11.5% and 10%, respectively. For the moment, we maintain our earnings projections of Bt14.6bn for this year and Bt18.1bn for FY13.
Less concern about the new managing shareholder
No matter who buys GE’s stake in BAY, the bank can continue with business as usual—and business as usual encompasses the strongest earnings growth profile in the sector. A new shareholder would merely need to leave things as they are in order for the bank to fulfill its promise for FY13. Note that the Rattanarak family and its allies hold 30% of BAY; any new managing shareholder must obtain the consent of this shareholding block before making substantial strategic changes. BAY’s board of directors recently appointed the incumbent CFO, Janice Rae Van Ekeren, as the new CEO in place of Mark Arnold, who announced his resignation on November 27.
Inexpensive valuation
We calculate that BAY will post the lowest FY12 PEG in the sector of only 0.27x; the Bank mean is 0.42x and the regional average is 0.69x (and, as noted above, its FY12-14 earnings CAGR is a spectacular 45.5%). We think a valuation re-rating would be likely at some stage after a new managing shareholder buys GE’s stake. Our YE13 target price of Bt36 is pegged to a justified PBV of 1.73x.