The cheapest - but with the strongest recovery BUY
TISCO Financial Group Plc (TISCO)
Investment thesis. We rate TISCO as the sector’s top pick for three reasons.
1) TISCO is the most undervalued bank, trading at the lowest 6x 2015F PER and 1.1x 2015F PBV, a big discount to its strong 18% ROE
2) We expect TISCO to see the largest fall in credit cost in 2015F on normalization to 120 bps from 150 bps in 2014F as the worst of deterioration in used car loans is over, rescued by the stabilization of used car prices in 1H14.
3) We expect a turnaround in loan growth from 3% in 2014F to a normalized 14% for 2015F as it is planning to shift focus to corporate and SME loans plus will benefit from the resumption of domestic car sales growth of 7-10%.
Forecast changes. We raised TISCO’s earnings forecast by 5% for 2015F and 11% for 2016F with these key changes: 1) Raise loan growth to 14% from 10% for 2015F and 15% to 12% for 2016F to take into account the upcoming investment upcycle and consumption recovery; 2) raise NIM forecast by 1 bps for 2014F to factor in the end of the BoT’s easing monetary policy; and 3) raise 2015F and 2016F non-interest income growth to 12% from 8% to factor in higher fee income related to lending and capital market activities.
Valuation. We raise target price by 6% to Bt50 from Bt47 as we change our valuation base to mid-2015 and to accommodate the upward revision of earnings forecast. Our target price is set at 1.45x average 2014F & 2015F BVPS, equating to 8.5x average 2014F & 2015F EPS and at its historical PBV mean since 2003 (excluding the 2009 outlier). The target PBV is based on L-T ROE of 16.3%, 3% L-T growth and 12.1% cost of equity.