Krungthai Card

Krungthai Card Plc 

 

Investment thesis

We attended KTC’s analyst meeting yesterday at which management reiterated its loan growth target of 10% and earnings growth of 10-15% for FY15, whereas its FY16 loans are set to grow 15% with small FY16 earnings growth. The small FY16 profit growth is due to higher FY16 OPEX for marketing campaigns to boost loans. In sum, we believe that our FY15-FY16 earnings are on par with the KTC’s guidance. Besides, KTC has scope for upside from cutting loan-loss provisioning (LLP) in FY15 and FY16 as its loan-loss cushion remains high at 395%. Its current D/E is 6.0x, which is far below its debt covenant ratio of 10x and allows KTC to expand for several years without a cash call. Our TRADING BUY rating stands.

Reiterate loan growth of  10% in FY15 and 15% in FY16

Following 7.9% YoY loan growth in 9M15, management anticipates 10% loan growth for FY15. Its personal loans and credit card loans grew 6.8% YoY (against FY15 target of 5-10%) and 8.7% (against FY15 target of 15%) during 9M15. Meanwhile, management targets the firm’s personal loan growth to reach 15% and credit card loan growth of 15% in FY16. KTC aims to raise its credit card spending by 15% YoY in both FY15 and FY16 after growing 12% in 9M15 to Bt104bn. We conservatively forecast it to achieve loan growth of 10% in FY15 and another 10% in FY16 (lower than KTC’s target of 15%).

4Q15 and FY16 core earnings to decline YoY from rising OPEX…

KTC guides that the firm might have bigger OPEX in FY16 from FY15 from more marketing campaigns (for boosting loan growth and total card spending) and higher cost from outsourcing of debt collection processes. KTC sets its marketing budget at Bt900bn in FY15 and 1.2-1.3bn in FY16. Also, KTC hired Win Performance to handle debt collection services from 1 May 2015. This outsourcing activity could allow KTC to have rising bad debt recovery and lower LLP.  Yet, KTC expects rising OPEX of Bt20-30m/month. We expect its cost/income to drop from 50% in FY14 to 48% in FY15 before rising to 49.2% in FY16.

High loan-loss-coverage ratio implies LLP cut in 4Q15 and FY16 

Management views that its current loan-loss-coverage ratio of 395% might be too high. This allowed KTC to reduce its LLP setting in 4Q15 and FY16, it said. Yet, KTC is currently without any policy to write back its loan-loss reserve into revenue.  We view that this could provide scope for upside to KTC’s earnings if the firm cuts its LLP in FY15 and FY16 lower than our model. We expect the firm to set FY15 LLP of Bt3.7bn (up 15% YoY) and Bt3.8bn (up 3% YoY) in FY16.