Investors should remain cautious as TIDLOR’s valuation looks stretched compared to peers

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Retail investors have been hoping to take a punt on TIDLOR, a micro-loan company that is lists on the SET Monday. In anticipation, investors had been selling some of their holdings in the other stocks to possibly participate in the initial public offering that took place late last month.

Ngern Tid Lor or TIDLOR, which is a unit of Japanese owned Bank of Ayudhaya Plc (BAY), has seen keen interest from both retail and institutional investors. So strong was the demand for the shares that on April 22, the 1st day of the retail investors subscription period, the number of people applying for the IPO crashed the system. (Read more here)

It has not just been the retail investors who have been divesting some of their portfolios to participate in the IPO but also institutional investors that have been keen to participate when the stock starts to trade at 10:00 AM on Monday.

New Broom Sweeps clean but old broom knows all the corners

TIDLOR is the microfinance unit of BAY and is one of the largest companies in the cash against autos segment. Ngern Tid Lor or TIDLOR which literally translated into Money on Wheels, offers sale and lease back via hire purchase, loans against autos owned by borrowers, and secured short term revolving loans.

BAY bought a fully owned finance company from AIG Group in 2009, to operate as cash against auto business. In 2014 it added a new business of selling insurance against autos, accidents etc. After changing its name to Ngern Tid Lor in 2015, it sold a 50 per cent stake to a private equity fund, CVC Capital Fund. The private equity fund holds TIDLOR under a special purpose vehicle with abbreviated name, SACA. CVC capital has limited investment life which ends in 2026.

It also offers non-life insurance for payment protection, auto 3rd party insurance, cancer, autos, and accidents. Simply put it lends against autos. Its main competitors are Srisawad Corporation Plc (SAWAD), Muangthai Capital Plc (MTC), Tisco Plc (TISCO), and other banks in the stock market listed segment, and many private companies.

As stated in the a previous article, the listing of new companies tend to perform well irrespective of valuation or priced, which may have many fundamental investors thinking that the price range is way beyond what they consider as value or realistic investment criteria.

Different from other IPOS

Although TIDLOR undertook an IPO only 23 per cent of the proceeds of the IPO comes to TIDLOR with the rest going to the shareholders. This means that TIDLOR can only use 23 per cent of the proceeds to rejuvenate or push forward its operations.

If one compares to the 34 IPOs from January 2019, only 5 companies namely Central Retail Corp. Plc (CRC), Sabuy Technology Plc (SABUY), NRF, KISS, and BAM had sold both new and vendor (existing) shares.

In the case of TIDLOR out of the total IPO, only 77 per cent of 907 million shares are primary i.e. new shares. If green shoe option is exercised, vendors will sell another 15 per cent of outstanding shares. 

Other companies with large proportion of vendor share in an IPO during the past 18-months has been BAM (81.7 per cent) KISS (60 per cent) SABUY (25 per cent) and CRC (21.3 per cent).

Taking out large proportion of vendor shares in an IPO is somewhat negative on two counts. First, investors may misconstrue that existing shareholders are cashing out or selling out and secondly the listed company gets a small portion of IPO funds as new money.

To make matters worst if one looks at the shareholders list they will see that the 2nd largest shareholder is a ‘private equity’. In the financial world it is a well known fact that private equity investments are usually for a short period and in the case of TIDLOR the private equity has a life span of only until 2026.

This shows that up to 25 per cent of the current shareholding is likely to be sold out within the next 5-years.

TIDLOR’s 2nd largest shareholder, CVC, is a limited life fund. Over the next 2-3 years, it will look to exit, which creates an overhang. Though it is possible that, CVC may exit through placements to funds, a shareholder with a limited life a factor to consider in the long-term holding and management of the company.

TIDLOR offered 907 million shares in the IPO at 36.50 baht per share. This would mean that TIDLOR raised 33.10 billion baht from the IPO but TIDLOR will only get 7.7 billion baht from undertaking the IPO, which increases its shareholders equity by 66 per cent to 19.40 billion baht (8.30 baht per share) from 11.70 billion baht at the end of 2020.

Stretched Valuations and Limited Growth Potential

IPO of TIDLOR is high-profile as many institutions, both local and foreign, bought before it was offered to the public. Retail investors response was overwhelming on the 1st day of the 3 days offer period causing subscription apps to jam due to high traffic of potential buyers.

EnquiStock has discussed in the earlier part of this note, that during the last 2 years, IPO have produced high returns in the initial days of listing. Even though a few IPO were priced at rich valuations, they still performed well as lure of making quick profit tempted investors to perhaps ignore high valuation by overestimating new companies’ outlook. 

The fact that there was an overwhelming demand for TIDLOR is a clear indication that the offering was successful but that does not guarantee that the shares would go up in the long-term.

Based on the projections (there are not many analyst reports on this company yet), TIDLOR is priced on a price to earnings ratio (PER) of 26.5x 2021 forecasted earnings which assumes that TIDLOR profit rises by 33 per cent in 2021.

Now compare this to other listed finance companies in Thailand, and current price of other new companies listed in Thailand over the last 2 years, TIDOR’s PER is expensive, even if it can record high profit growth.

This means that the PER of 26.5x has already taken into consideration that TIDLOR’s would be expected to grow at 33 per cent during the course of this year.

Compare this to SAWAD or MTC. SAWAD is trading at just over 25x PE for 2021 while MTC is trading at just below 26x although both SAWAD and MTC have far bigger asset base and portfolio not to mention the market capitalization.

Also both MTC and SAWAD received a big chunk of the funds from their IPO with MTC receiving 3 billion baht and SAWAD receiving 1.73 billion in new capital which accounted for 130 per cent and 158 per cent of their pre-IPO equity base. For TIDLOR, new capital is 66 per cent of its existing capital.

As percentage of existing capital base, amount of new capital base is relatively small, but it can still grow its business rapidly because its current capital base is already large at 11.80 billion baht, which will rise to 19.50 billion baht post IPO. This will bring ITDLOR capital base in vicinity of MTC’s 24 billion and SAWAD’s 21 billion baht.

Large Capital Base Poses Challenges to Maintain ROE

TIDLOR’s profit grew by 20 per cent per annum in last 2 years. To raise the bar to 33 per cent per annum is optimistic given analysts are forecasting industry profit growth at 20-22 per cent per annum.

Last year, TIDLOR recorded return on equity (ROE) of 22.9 per cent, slightly better than 22.3 per cent of SAWAD but below 28.4 per cent of MTC.  While increased capital will power up TIDLOR profit growth, maintaining a high ROE to at large capital base can be challenging given the rising competition and risk of increased regulation.

In the last 5 years, period staring 1 year after their IPO, MTC recorded cumulative average growth rate (CAGR) profit growth of 44 per cent per annum vs. 28 per cent of SAWAD.

*TIDLOR post IPO price to book at IPO price, PER assumes profit growth of 33% in ‘21F

MMFS and BAF are India’s large micro finance, leasing companies 

In terms of loans outstanding, MTC is the largest cash for auto company among the SET listed companies with gross loans at the end of December 2020 of 70.80 billion baht, of which vehicle title loans are 51 billion baht (unsecured loans are 7 billion baht).  

At the end of last year, SAWAD reported total loans of 46.60 billion baht of which 20.30 billion baht are vehicle title loans. 

For TIDLOR, total loans stand at 51.30 billion baht and estimated 43 billion baht is in the vehicle title loan segment. As for TISCO, vehicle loans are perhaps at 33-35 billion baht.

TIDLOR claims to be the fastest growing bank owned franchise in this segment. In last 4 years, growth for cash for auto loans has been following 

MTC               38%/28%/23%/19%

SAWAD         7%/20%/40%//16%

NTL                92%/130%/36%/11%

Source: Estimated from various publicly available information and analyst estimates. 

Will KTC factor be repeated?

TIDLOR is 30 per cent owned by BAY and therefore similarities have been made between TIDLOR and Krung Thai Card Plc (KTC) which has a market capitalization larger than its parent company Krung Thai Bank Plc (something already discussed in Part 1 of this series).

Investor may think KTC, a subsidiary of KTB, has been able to demonstrate strong profit growth and enjoy high PER rating. If TIDLOR can replicate the profit growth of KTC, it may command a high PER rating of 30.8x 2021 earnings estimates.

EnquiStock would not say much as EnquiStock does not agree with KTC’s valuation of 35.5x its PE. Further, Ratchathani Leasing Plc (THANI) which is owned by now merged TMBThanachat Bank Plc, is another bank owned finance company is trading on PER of 12.4x 2021 earnings forecast.

Some Good Factors to help

There are some good points to this industry and TIDLOR as loans against auto titles or secured loans to vehicle owners have been in high gear over the past decade due to stringent lending regulations on banks and banks reluctance to aggressively target this segment due to perceived high risk, and small size, and duration of loans. 

Consumers credit cycle has been resilient for at least last 5 years due to cheap credit, limited availability, and lack of competition.

Analysts claim that cash for autos will enjoy high growth over the next 3-4 years due to the following factors

  • Limited availability to micro finance in the provinces
  • Efficient market mechanism in lending and confiscation of underlying assets of defaulters
  • High vehicle ownership in Thailand – according to Rakuten Insights, an data research service, vehicle ownership in Thailand is at high at 65% level, less than 61%-63% in Indonesia and Malaysia 
  • Highly liquid market for used autos in Thailand. This is a big incentive for lenders to sell collateral when borrower misses payments
  • Easy possession process – most borrowers use autos as their business asset, and honor loans payments before defaulting on other commitments such as mortgage or loans for household goods
  • Low erosion in vehicle price. Data from Bank of Thailand shows, price of used vehicles has returned to ’17 level

Source: BOT

High growth industry

TIDLOR estimates that vehicle title loans have grown to 340 billion baht in 2020 from 150 billion baht in 2015. Total outstanding loans against vehicles may rise to between 520 billion baht and 620 billion baht over the next 3 year.

The borrowers are mainly micro business owners, street vendors, taxi drivers, farmers, and traders. They lack income predictability, financial literacy, record keeping, and access to banks. Hence, they find difficult to borrow from commercial banks.

Regulations and Competition to Reduce Profitability 

But there are also some negative factors as regulators clamp down on the interest charged. Earlier in the last decade this industry has enjoyed super normal profit due to lack of regulations. Over the past few years, rising industry size and increasing consumer debt to GDP in the country forced Bank of Thailand to impose restrictions and a few mild regulations. 

Although the lenders are still get away to make high return despite interest rate caps by charging super high processing fee and hidden charges, recent focus on banks such as Kasikorn Bank Plc (KBANK), Siam Commercial Bank Plc (SCB), etc. to explore this segment has led to mild price squeeze. 

For example, SCB and KBANK charge implied effective interest rate of up to 10 per cent per annum for cash for auto loans vs. 18-27 per cent charged by SAWAD, MTC, and TIDLOR. 

Commercial banks have so far targeted hire/purchase loans to buy new or used cars. But with the hire/purchase market saturating with low growth and intense competition, there is very possible risk of commercial banks to follow TIDLOR. This risk however is at least 2 year away considering the banks focus on managing Covid distress in their commercial loan’s books. 

Private companies are bigger threats

The industry remains fragmented, and financiers have limited capital. This is bound to lead to consolidation and joint venture with financial institutions. An example of such developments is a recent joint venture between SAWAD and Government Savings Bank (GSB).  The JV named Fast Money or FM offers loans at interest rate of 15 per cent effective interest rate for 3 months for motorcycles for now. Offered presently at 35 branches of GSB for now, FM’s network will rise to over 800 branches by the year end to offer cash loans at 15-18 per cent per annum.

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