Srisawad Power 1979

Investment highlights 

- Higher loan target, but we stick to our original view. Management revised up its loan growth target to Bt12bn (+54% YoY) on the back of an expanded network to 1,600 branches by this year-end. However, we maintain our net loan growth estimate at 36%, to around Bt10.3bn, as we believe SAWAD’s strategy of aggressive branch expansion is aimed at securing markets before competitors, which is likely to cause some trade-off from the cannibalization effect. As such, we expect the 200 planned new branches in 2H15 will not contribute significant loan volumes this year.  

-  NPLs are not a concern as lending to SMEs has not been aggressive. Loans to SMEs currently account for 4% of total loan portfolio and should not exceed company’s target of around 10% at most. SAWAD continues to apply its stringent LTV policy of 50% to collateral value under direct evaluation from management. SMEs loans is designated as overdrafts to support the short-term liquidity with contract terms of less than 12 months, so NPLs should not surge from this segment.  

-  Lower cost of funds. Management disclosed that the recent Bt2bn-debenture issuance with a quoted interest rate of 4.1% was successful. We see the lower trend on cost of funds for SAWAD becoming concrete and making our full-year forecast of 4.18% achievable.  

- Certain revenue from debt management by 2017. As of 2Q15, SAWAD had invested Bt200mn to buy Bt700mn of NPLs for its asset management business. SAWAD will amortize the invested cost once collection is made, and then the revenue recognition should be booked once the cost is fully amortized. The company expects this chunk of NPLs to be processed within 3 years. Moreover, SAWAD plans to purchase more collateralized NPLs with a budget of up to Bt1bn this year. This is in line with our forecast for 2017 revenue recognition of Bt400mn.  

- Managing NPLs with a tighter collection process. Thanks to its close relationships with customers and tightened collection process, management is confident that NPL ratio should not spike significantly from the current level of 5.3% vs our forecast of 5.7% at year-end. Also, SAWAD assumes there will be no general reserve set aside this year. 

Valuation 

- We maintain our earnings forecast and our Outperform rating with an unchanged fair price of Bt48 based on an appropriate PEG of 1.0x and our projection for net profit to grow at a 3-year CAGR (15-17E) of 33.2%. The stock is currently trading at a 1-year forward PBV of 7.8x and PER of 27.1x.