STOCK FOCUS – BAM to benefit from economic malaise of Thailand as NPLs set to rise amid downturn

There are very few companies that people can tap into when a country’s economy is on a downhill trend. With Thailand’s economic condition deteriorating by the day, one company stands out to possibly benefit from this downturn – Bangkok Commercial Asset Management Plc (BAM).

BAM’s good fortunes are tied to the malaise of Thailand. During the boom days, companies such as BAM tend not to be in demand but in any kind of downturn, these companies usually are in high demand.

Thailand’s growth is experiencing a slowdown in every field possible, be it in manufacturing, exports, or the tourism sector. The downturn in nearly all sectors is likely to have a ripple effect as repayment strains are starting to be visible in all sectors of the economy.

To make matters worse, the outbreak of the novel coronavirus, which has claimed the lives of more than 1,000 people, has had a major impact on tourism with hotels, restaurants, tourism venues, and even traditional massage venues feeling the pinch of the tourism dollar disappearing from their daily lives.

The severity of the situation is likely to be more visible in the weeks and months ahead as many of the tourists in the country are those who made their bookings months ago. New bookings are starting to show a decline in high double-digit numbers.

Hundreds of billions of baht are set to disappear from the fall in tourism numbers, and with tourism accounting for more than 20 per cent of the gross domestic product (GDP) the impact of the slowdown is going to be far-reaching.

To top this off is the fact that Thailand is in the midst of what the Thai Meteorological Department says is likely to be the worst drought in 40 years. The Thai Meteorological Department says that as much as 61 per cent of the country’s water reserves are now operating at less than 50 per cent of the their capacity, and that overall water content has fallen to 59 per cent of the capacity, while usable content is at a mere 25 per cent.

The Thai Meteorological Department has already warned that the water levels could fall further with the dry season in the first half of the year. With water levels in the Mekong River at their lowest since 1992, there is every likelihood that it would affect both agricultural and urban Bangkok in a severe manner.

Analysts estimate that agricultural output accounts for 8 per cent of the GDP, and as of just over a year ago data showed that as much as 33 per cent of the labour force was employed in the agricultural sector, with 50 per cent of the population living in the rural areas. On the demand side, the agricultural sector accounts for about 20 per cent of the GDP and about 60 per cent of consumption.

Exports have shown a slowdown in 2019 by more than 2 per cent, and all other economic indicators are showing signs of a slowdown. This has been reflected in the fact that even the Bank of Thailand has lowered the GDP growth projections for 2020 to a mere 2.8 per cent, from the 3.3 per cent it had projected late last year.

Even the most bullish people in the Cabinet – Deputy Prime Minister Somkid Jatusripitak, has come out to say that the economy would barely reach a growth rate of 2 per cent in 2020.

If the economic slowdown was not a good enough story to make investors look at BAM, then the rising household debt could help change their minds.

According to data from the Bank of Thailand, the country’s current household debt stands at close to 80 per cent of the country’s GDP.

Thailand’s household debt has been on the rise. According to the University of the Thai Chamber of Commerce (UTCC), the average household debt in Thailand rose by 7.4 per cent during 2019. The UTCC said that the average debt stood at 340,053 baht per household from 316,523 baht a year earlier.

Amidst this tough economic environment, Thailand’s banking sector has been witnessing a rise in the non-performing loans (NPLs) by almost 200 billion baht since 2013, from 266 billion baht to 451 billion baht, as of the end of the second quarter of 2019.

The rise in NPLs has been coming from all segments of the economy with consumer loans seeing the sharpest increase in the bad debt numbers, with the NPL ratio increasing from 2.20 per cent in 4Q2013 to 2.74 per cent in 2Q2019.

Consumer loans are not the only area that has seen a rise in NPLs; even the usually stable housing mortgage loans have seen an increase in their NPLs.

How BAM is positioned to benefit

BAM is the single largest commercial asset management business player with just under 50 per cent of the market share in this business.

BAM’s position in the market is near market domination with BAM’s assets leading the second nearest competitor by 30 per cent. This gives BAM the market-leading position and also the ability for the firm to place itself as the main buyer and collector of debts in case there is an increase in NPLs in all segments of the economy.

BAM’s core business is the purchase of credit receivables (NPLs) and property foreclosed or non-performing assets (NPAs). As a result, its businesses are counter-economic cycle. As of the first nine months of 2019, NPLs and NPAs acquired or transferred from financial institutions accounted for 65 per cent and 19 per cent, respectively, of BAM’s total assets. The revenues from NPLs and NPAs represent 85 per cent and 15 per cent of the total, respectively.

Real estate backed assets

The positive thing with BAM is the fact that the bulk of their portfolio is backed by real estate, a sector that has traditionally been very stable and usually bounces back after any short-term blips that occur.

According to available data, BAM’s NPLs portfolio is heavily tilted toward real estate backed assets, which account for around 80 per cent. A break down by collateral type shows that out of this 80 per cent real estate portfolio, the residential sector represents about 45 per cent, commercial property 27 per cent, and vacant land 25 per cent.

As of the third quarter of 2019, around half of its assets, which amounted to 471.1 billion baht, were larger than 100 million baht. As BAM acquired NPLs and NPA from financial institutions at a heavy discount to collateral value (around 30-40 per cent of the fair purchasing price), gains from NPL and NPA settlements in non-net interest income (NII) are a major revenue contribution to the income statement (around 84 per cent of total income), followed by NII (16 per cent of total income).

Normally, cash collection for NPLs and NPA takes around seven years and five years, respectively, to break-even. This would mean that BAM will have stable cash collection over the years to come.

What should we expect in 2020?

After the company undertook its initial public offering (IPO), one thing certain is that BAM will start paying corporate taxes, following Financial Institutions Development Fund (FIDF) shareholding dilution from 100 per cent to 50 per cent after the IPO.

After the IPO, BAM is likely to lower its debt-to-equity ratio from 1.79x to 1.10x, which is significantly below its debt covenant of 2.0x. As FIDF shareholding fell below 50 per cent post-IPO, it might see its credit ratings downgraded with credit spread widened, which will negatively impact its funding costs from 2020 onward.

BAM will also adopt deferred tax accounting from 4Q2019, which will result in a one-time tax credit of 5.9 billion baht, boosting 4Q2019 net profit by 288 per cent year-on-year, and 731 per cent quarter-on-quarter, based on sell-side analyst estimates.

Moreover, if BAM has to adopt TFRS9, it will substantially improve its NII, which will offset by lower gains on NPL (accounted for 71 per cent of total gross revenue for 9M2019). Having said that, we can expect net profits to decline 58 per cent in 2020, (forecasted from high base as it has a one-time 5.9 billion baht tax credit from deferred tax accounting adoption and 1Q2019’s big ticket NPL gain windfall) before resuming its growth in 2021 and 2022, with a growth rate of 15 per cent and 19 per cent, respectively.

At what price should we call it “fair”?

BAM is trading at a discount compared to its closest peer in the market JMT Network Services Plc (JMT), which has a price-to-book ratio of 4.6x.

BAM is expected book value per share for 2020 around 15.00 baht. Applying a fair P/B multiple of 2.3x, half of what JMT is currently trading at, this will derive its fair price at 30.00 baht per share.

Using different matrices, BAM is expected to generate an earnings per share and dividend per share of 1.57 baht and 1.10 baht in 2020, respectively. Our target price of 30 baht will imply its fair PE and dividend yield of 19.1x and 3.67 per cent, respectively.

Although it has increased about 37 per cent since its IPO in December 2019, BAM still has a meaningful upside left from its current market price of 26.00 baht, or an expected incremental return of around 17 per cent. Although the target price is near what it is trading at currently, the upside of the shares could come once the economy goes for a tailspin.

Nonthapat Setthiprasert is an analyst and investor working in the Thailand and the region.

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