KTBST Revises TMB to “BUY” with a Target Price at ฿1.86, Seeing an Inexpensive Valuation

KTB Securities (KTBST) upgrades rating on TMB to BUY from HOLD, but cut our target price to ฿1.86/share (PBV of 0.79x, -1.75 SD below 5-yr average PBV) from ฿2.12/share (PBV of 0.90x, -1.50 SD below 5-yr average PBV). TMB’s share price hits its 7-yr low trading at 0.68x, which is even deeper than -2 SD below 5-yr average PBV, following an announcement of the capital increase with TSR of Bt1.35-1.60.

KTBST views the current share price as an opportunity to buy TMB’s shares to obtain subscription rights for TMB’s newly issued shares, as KTBST believes new TMB will be able to reap synergy benefits right after a merger with TBANK, which is more quickly than other banks’ merger deals. In expectation of TMB’s asset reclassifications before the merger, KTBST cuts 2019E/20E net profit forecast by 3.3%/2.8% as KTBST raises the credit cost assumptions to 130 bps from 125 bps.

 

Company Update: Inexpensive valuation, good opportunity to increase positions

TMB’s share price hit its 7-yr low trading at 0.68x, which is even deeper than -2 SD below 5-yr average PBV, following an announcement of the capital increase with TSR of Bt1.35-1.60. KTBST thus views the current share price as an opportunity to buy TMB’s shares to obtain subscription rights for TMB’s newly issued shares.

KTBST estimates price for new share at Bt2.06/share based on the value of an additional asset of Bt1.9tn, an average ROE of TMB and TBANK of 10%, and justified PBV of 0.90x, which has yet incorporated a potential increase in ROE from synergy benefits.

KTBST expects new TMB to reap synergy benefit at a relatively faster pace. KTBST believes new TMB will reap synergy benefits from a merger with TBANK more quickly than a merger of other banks’ merger deals.

In the near term, cost of funds is expected to decrease immediately given TMB’s strength in fund mobilization, while loan yield would increase as new TMB will be able to cross-sell TBANK’s HP loan products, including “cash your car”, and increase the size of TBANK’s HP loan portfolio. Additionally, retail and SME loans from both TMB and TBANK are duplicated by just 10% and 4%, respectively.

In the next 3-5 years, new TMB should stand to benefit from cost-saving, in terms of IT and marketing expense, as well as a decrease in the number of branches and ATM machines.

However, KTBST cuts 2019E/20E net profit forecast by 3% to reflect revisions in credit cost, lending rate, effective tax rate, assumptions. KTBST cuts our 2019E/20E net profit forecast by 3.3%/2.8% as KTBST raises our credit cost assumptions to 130 bps from 125 bps and revise down both effective tax rate forecast by 25 bps and effective tax rate estimate to 18.5% from 19.5% (13% in 2Q19 after closedown of TAMC). KTBST expects TMB to reclassify its asset quality and thus write off NPLs before a merger with TBANK, which should result in credit cost rising.

 

Valuation/Catalyst/Risk

KTBST revises the target price down to Bt1.86, which is pegged to PBV of 0.79x, or -1.75 SD below 5-yr average PBV, from Bt2.12 (0.9x, -1.50 SD below 5-yr average PBV). KTBST has yet incorporated synergy benefits from a merger with TBANK into our model as transactions are expected to complete by YE2019E, while KTBST sees scope the Bank of Thailand to make a further rate cut over the course of the year.