Srisawad Corp: <FY25F> Returning to growth
- 3Q24 earnings came in at THB1.3bn (-6.2% y/y; +2.8% q/q), in line with expectations
- FY24F/FY25F earnings cut to reflect portfolio contraction in 9M24
- Expected to return to growth mode in FY25F with loan growth target of 10-15%, while HP loans still the key drag
- Maintain HOLD with a higher TP of THB39.00
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Pre-provision operating profit (PPOP) increased 3.1% y/y but declined 1.3% q/q. The y/y increase was attributed to higher fee income and lower operating expenses (OPEX), while the q/q decrease was due to lower interest income.
9M24 earnings accounted for 73% of our new FY24F forecasts. Note that normally SAWAD’s operating performance is stronger in 2H than in 1H, and 2Q is usually its lowest quarter.
Loan portfolio contracted 2.8% q/q and 1.3% YTD-Sep. Recall that SAWAD has shifted its focus to asset quality and liquidity, instead of portfolio expansion, due to the difficult conditions of the bond market in 3Q24. With that, its loan portfolio contracted 2.8% q/q and 1.3% YTD-Sep to THB99bn at end-3Q24.
Nonetheless, management revealed that the situation in the bond market has eased and expects its upcoming THB2.5bn debenture issuance (expected in Dec 2024) to be fully subscribed. As such, it believes loan growth momentum will resume in 4Q24F onwards.
Note that SAWAD has 5,695 branches at end-3Q24 (vs. 5,622 at end-2Q24, 5,534 at end-1Q24, and 5,430 at end-4Q23), i.e., +265 new branches in 9M24. SAWAD has guided for about 300 new branch openings per year.
In terms of loan breakdown, car title loans made up 25% of the total loan portfolio; land title loans made up 25%; motorcycle title loans (partly under its 98% subsidiary [Fast Money: FM] and partly under SAWAD’s other subsidiaries) made up 16%; motorcycle HP loans (operated under its 72% subsidiary – SCAP) made up 31%, and personal loans (also operated under SCAP) made up the other 3% of loans at end-3Q24.
HP loans will still be the key drag. With the company’s loan portfolio’s quality problem arising from its aggressive motorcycle HP lending strategy in FY22, prior to the motorcycle HP rate cap (at 23% p.a.) effective 10 Jan 2023, SCAP’s strategy has shifted towards asset quality management (i.e., balance sheet clean-up) and away from portfolio expansion.
While management believes the balance sheet clean-up process (starting in 3Q23) has largely been done in 2Q24, large write-offs remained in 3Q24 and are likely to extend into 1H25F.
NIM contracted in 3Q24. NIM contracted y/y and q/q due to the decline in yield (due to loan portfolio contraction) and the increase in cost of funds (despite lower funding base) in 3Q24. Note that yield in 3Q23 was abnormally high due to the one-off interest income from NPL reclassification in that quarter.
Note that there is room for yield to improve from motorcycle title loans, given that the interest rate for vehicle title loans is capped at 24% p.a., while those motorcycle title loans in FM’s portfolio are charged at only 15-18% p.a.
FY24F NIM is expected to also decline from lower yield and higher cost of funds. On a full-year basis, we expect yield to decline due to (i) the full-year consolidation of FM’s loan portfolio (i.e., motorcycle title loans, where yield is lower than SAWAD’s average yield) and (ii) the interest rate cap on motorcycle HP (i.e., capped at 23% p.a. since 10 Jan 2023 vs. approx. 36% p.a. previously charged).
Meanwhile, cost of funds should increase from rising interest rates and a larger funding base. Net-net, FY24F NIM is likely to decline vs. FY23.
OPEX declined y/y and q/q due to lower loss on sales of repossessed vehicles. OPEX decreased 6.8% y/y and 2.0% q/q in 3Q24. The decline was attributed mainly to lower loss on sales of repossessed vehicles (from the motorcycle HP business).
Based on the number of vehicles repossessed in the respective quarters, management believes loss on sales of repossessed vehicles (at SCAP) should have already peaked (in 3Q23) and expects it to further decline in 4Q24F.
Cost-to-income (C/I) ratio also declined y/y and q/q to 51.1% in 3Q24 (vs. 53.6% in 3Q23 and 51.3% in 2Q24). On a full-year basis, however, we expect its C/I ratio to increase to 51.3% in FY24F (vs. 49.7% in FY23), mainly due to higher loss on sales of repossessed vehicles.
Fee income improved y/y and q/q. SAWAD’s fee/other income comprises appraisal fees, penalty fees, services fees, insurance commission fees, management fees, and income from bad debt recovery. Most of these fees tend to grow in line with loans.
Fee income increased 31.5% y/y and 19.6% q/q in 3Q24, on track with management’s plan to grow its insurance sales through its branches (scan and go) and mobile platform (license for online insurance sales granted) to boost fee income.
NPL ratio ticked up, but credit cost declined. NPL ratio increased to 3.5% at end-3Q24 (vs. 3.4% at end-2Q24), due to the fragile economic conditions, as well as from the contraction of the loan base.
Meanwhile, its credit cost declined to 1.9% in 3Q24 (vs. 2.1% in 2Q24), due to less loan write-offs compared with the previous quarter. With that, coverage ratio ticked up but remained low at 61.1% at end-3Q24 (vs. 59.8% at end-2Q24).
FY25F: Returning to growth. Management revealed that it currently has a THB8bn (unused) credit line available from local banks, on top of the THB2.5bn debenture to be issued in Dec 2024 – this is aside from its expected (gross) cash inflow from business of about THB4-5bn per month.
With that, easing bond market conditions, and the company’s improving asset quality, management is confident that it will achieve 10-15% loan growth in FY25F. It has also guided that credit cost should gradually decline to 180bps in FY25F (vs. our assumption of 190bps).
Nonetheless, it believes liquidity should still be preserved and therefore plans to continue paying stock dividends rather than cash dividends for FY24F/FY25F, similar to FY23.
FY24F/FY25F earnings cut by 2%/6%, mainly to reflect lower loan growth in FY24F. As we incorporate SAWAD’s 3Q24 results and revise our key forecast assumptions, we cut our FY24F/FY25F earnings forecast by 2%/6%.
Specifically, we cut our FY24F loan growth assumption to 1.7% (vs. 10.9% previously). to reflect the company’s shift in business strategy towards liquidity preservation and asset quality control (vs. portfolio expansion previously). With that, its FY24F/FY25F revenue growth was cut to 13.3%/8.1% (vs. 15.9%/12.5% previously).
We now expect SAWAD’s FY24F/FY25F earnings to increase 4.9%/15.5% (vs. 7.0%/19.8% previously).
Maintain HOLD with a higher TP of THB39.00. As we incorporated SAWAD’s 3Q24 results, we revised our key assumptions for FY24F-FY25F and rolled over our valuation base to FY25F. With that, we derive a higher TP of THB39.00 (vs. THB34.00 previously) for SAWAD. Our TP is based on 1.5x FY25F P/BV, i.e., 1.5SD below its 5-year average P/BV. While we expect SAWAD’s portfolio quality to remain weak, we believe it is close to the bottom. Nonetheless, its asset quality and earnings growth outlook remain inferior to its peers. With that, our HOLD rating stands.
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