Srisawad Power 1979

Srisawad Power 1979 Plc (SAWAD)

 

Investment thesis

We attended SAWAD’s analyst meeting yesterday. Management gave an ambitious FY16 guidance for earnings growth of 20-30% and loan growth of 30%. We believe that this guidance looks promising and on par with our model due to strong loan demand from untapped markets (non-bankable markets). Besides that, its stringent lending policy from low loans to those valued at 45-50% could mitigate NPL losses. Hence, we have seen scope for upside to our model from: 1) stronger lending growth than assumed (from inorganic growth), 2) better fee income growth from new business in debt-collection services, and 3) lower loan-loss provisioning (LLP) than we modeled. We have maintained our BUY rating for SAWAD.

Ambitious FY16 gross loan growth target of about 30%

We maintain our FY16 gross loan growth rate to 30% (and 35% on net loan growth), which is in line with management’s guidance. Note that SAWAD was able to drive its net loans up 35% in FY15. The drivers will come from fast expansion of its branch networks from 1,059 at YE14 to the present 1,627. Management targets 2,000 total branches at YE16 and 2,200 at YE17. The slower FY16 branch expansion could imply that its Cost/Income has room to drop from 48% last year, management cited. However, we conservatively forecast that SAWAD’s OPEX will rise 43% in FY16 from 37% growth last year. This provides scope for upside if the lender delivers OPEX that are lower than our numbers.

Asset quality has been quite focused

SAWAD has a very conservative lending policy, with loan to value (LTV) in in the range between 45-50%. The low LTV ratio enables SAWAD to mitigate NPL loss by forcing sale of client collateral at less loss, we believe. The firm was able to control its NPL ratio of 4.6% at YE15 from 5.7% at YE14 (and management expects to maintain its NPL ratio at this level this year). Its credit cost is set at 150bps in FY16 close to last year (we conservatively forecast its FY16 credit cost of 172bps). The lower credit cost means scope for earnings upside to our model.

AMC and foreign expansion will fuel growth for a few years

Apart from its local lending business, SAWAD has diversified into distressed asset management and debt-collection services through its subsidiary (SWP). Management has set budget of Bt4bn for FY16 after SWP bought NPL totaling Bt1.2bn during 2H15 at the discount rate of more than 20% of face value. Besides that, SAWAD plans to develop lending business in Vietnam this year. Both could contribute to its bottom line by 15-20% for the next few years. Again, we have excluded these from our model.