Srisawad Power 1979

Investment thesis

 

Khun Thida Kaewbootta (Director of SAWAD) has set ambitious long-term ROE targets of 33-35% per year during FY15-FY17. The firm’s management views that its key earnings drivers will be derived from high-loan-growth targets of 30-35% for the couple of years, well managed asset quality and new business from debt collection services and Nanofinance. Our model is consistent with its financial targets. There is scope for upside to our model from: 1) stronger-than-assumed lending growth (from inorganic growth) and 2) less-than-modeled loan-loss provision (LLP). We reiterate our BUY rating on SAWAD.

Ambitious ROE target of 30-35%, propelled by high loan growth

SAWAD management sets its robust ROE target of 30-35% during FY15-FY17. The drivers will come from high-loan-growth profiles. The company’s leaders set their loan growth target of 20-30% during FY15-FY17, driven by aggressive lending in the bank’s untapped market. Note that the National Statistical Office (NSO) said that 25 million members of the workforce were “out of system” (not on a payroll or drawing a fixed salary). We expect its FY15 loan growth to reach 20%. 

Nanofinance and debt collection services to support growth in 2H15

Presently, SAWAD was awarded Nanofinance licenses from the Ministry of Finance in May 2015. The management has set its lending budget at Bt500m for this project and it will commence in 3Q15. Its potential clients will be buyers (franchisees) of local franchise brand names, such as Jiang Fish Ball, Kieng Empire, Hong Kong Noodles, and Joke Bangkok, management said. Aside from that, SAWAD management will diversify its business into distressed asset management and debt collection services through its subsidiary (SWP). The company has set budget of Bt1bn for these new ventures. Note that SWP bought NPLs amounting to Bt200m during 2Q15 at the discount rate of more than 20% from face value. We exclude both projects from our model.

Plan to launch bonds of Bt2.5bn in late 3Q15 to boost expansion

We remain unsurprised by its plan to launch Bt2.5bn in bonds in 2H15 due to the firm’s fast expansion outlook. Note that SAWAD plans to raise its branch network to 1,350 offices at YE15 and 1,500 offices in FY16 from 1,059 offices at YE14. The high growth in branches could allow the firm to boost its lending as well as its efficiency in debt collection. We remind that SAWAD came up with a low net-D/E ratio of 1.7x at end-March 2015. We estimate that the new borrowing will bring its D/E ratio up to 2.4x, which is far below the Bank sector mean of 10x The implication is that SAWAD could leverage its D/E ratio for aggressive expansion for a couple of years without a cash call. We now are free of concerns over its financial positions for this year and next.