Aug-2018 VALUATION Our consensus valuation for SBM Holdings Ltd (SBM) is computed to stand at Rs7.59 which represents a 15% upside on its closing price of Rs6.58 on 30-Aug-18 and therefore upgrade our rating from "ACCUMULATE" to"buy" onthe stock. We used prevailing ratios of for a comparable set of peers, applied a PER of 11x, PDR of 23x and PBV of 1.3x in our market ratios method; we ignored the cost of debt in the Dividend method and applied a 7% premium to the GMB 10Y; and computed the WACC to stand at 9% by applying a 7% premium the 10Y GMB and using 1.7% as the effective cost of funds for the Cash Flow method. PERFORMANCE REVIEW & PROSPECTS Tepid demand for lending given slow macro-economic growth in Mauritius led to a stagnant loan book between 2011-15. SBM compensated for this by increasing placements in Gilt-Edged securities. Since, SBM has boosted Seg B lending and expanded its regional presence. Subsequently NII growth accelerated to 9% in FY-17 and 21% in H1-FY18 boosted by strong growth in its non-mur Seg B loans. NFCI in 2017 stood at a record Rs1.2bn (+18%) and grew by another 20% in H1-18 boosted by customer (retail & corporate) fees generated from its larger loan-book, and offering a broader spectrum of services (incl. premium banking) to clients. OI surged 55% in FY-17 to Rs1.6bn following the creation of a desk dealing in financial instruments (mostly derivatives). The shift in HR policy, IT costs and expansion initiatives have resulted in a significant deterioration of CIR to 45% in FY-17 and 48% in H1-18. EBIT stood at Rs4.2bn (+13%) in FY-17 and Rs2.1bn (+5%) in H1-18. It appears that some oversight during this rapid expansion has resulted in a deterioration of SBM s credit quality as exemplified by the impairment of a fraudulent facility of $27M; and higher provisioning on the back of expansion initiatives. Based on recent events and observations, we believe SBM s PAT will slump to Rs1.1bn in FY-18 thereafter increasingly non-linearly and not expected to return to 2017-levels in the short term. OVERVIEW SBM was established after independence in 1973 by Government as a bank of the people took its present shape in 2013 wherein banking activities were segregated from non-banking activities. SBM embarked on its internationalisation in the mid- 90s and now has a presence in 4 countries in Africa and Asia. The drive to grow overseas was re-vitalised in 2017 through acquisitions in Kenya, and gaining wholly-owned subsidiary status in India. The Group s strategy is to grow its presence in the region so as to drive cross border business across a broader portfolio of services offered. In 2017, ~96% of SBM's revenue from external customers was generated by its banking cluster of which ~97% was generated by SBM Bank (Mauritius) of which Segment B accounted for ~32% compared to 19% a decade ago. In terms of Market Share, SBM controls a little over 20% of both domestic Credit and Deposits. Catalysts Threats Diversification of Services Deterioration of Credit Quality Expansion in Kenya & India Negative Media Coverage New HR Practices to Attract Talent Ratings Agency Downgrade Indices = 100 on 30-Jun-15 SBM LCP Δ to FV CDS Code: ISIN Code: Bloomberg Code: Reuters Code: Low Rs6.58 15.4% FAIR VALUE 7.59 RATING BUY PER+1 DY+1 PBV+1 FP 52-Wk Range 10.8x 4.2% 0.71x 23% SELL Reduce HOLD Acc. BUY 118 109 100 91 82 73 64 ALCAPEX-12 SEMDEX SBM SBMH.N0000 MU0443N00005 SBMH MP SBMH.MZ High Highlights LD Ratio NI Spread Op. Income EBIT Adj PAT EPS DPS NAV [%] [%] [Rsbn] [Rsbn] [Rsbn] [Rs] [Rs] [Rs] 2015 2016 2017 2018F 2019F 2020F 66.6 68.2 77.0 77.9 79.8 77.4 4.1 3.9 3.6 3.2 3.1 2.9 6.3 6.4 7.6 8.0 8.5 8.2 4.0 3.7 4.2 4.1 4.3 4.0 1.61 2.31 2.57 1.09 1.79 1.47 0.62 0.89 1.00 0.42 0.69 0.57 0.30 0.40 0.40 0.19 0.31 0.26 8.59 9.22 9.75 10.31 10.56 10.94 KPIs 2015 2016 2017 2018F 2019F 2020F CI Ratio [%] 36.3 42.5 44.7 49.3 49.7 51.3 CA Ratio [%] 28.3 25.7 20.0 0.0 0.0 0.0 NPL [%] 0.0 0.0 0.0 0.0 0.0 0.0 Imp Ratio [x] 2.80 0.98 1.18 2.29 1.58 1.58 ROE [%] 7.2 9.7 10.2 4.1 6.6 5.2 ROA [x] 1.18 1.57 1.33 0.50 0.78 0.61 PER [x] 11.4 7.4 7.5 17.7 10.8 13.2 DY [%] 4.2 6.0 5.3 2.5 4.2 3.4 PBV [x] 0.83 0.72 0.77 0.73 0.71 0.69 All per share related metrics are calculated on a fully diluted basis i.e using current number of shares A: AXYS Stockbroking Ltd, 6th Floor, Dias Pier Building, Le Caudan Waterfront, Caudan, Port-Louis, 11307 T: (230) 405 4000 F: (230) 213 3478 E: research@axys-group.com W: axysstockbroking.com BRN: C07007948 Rs6.58 Rs7.98 Trading data 30-Aug-18 No of Shares: 2,582M Market capitalisation: Rs17bn Weight on SEM: 6.0% Weight in SEM-10: 10.0% Ave. daily val. traded: Rs4.9M Ave. daily vol. traded: 650,700 YoY Total Return: -11.2% All Time High: Rs10.80 on 07-Aug-14 KEY P&L TRENDS 7.57 8.02 8.51 49 50 6.26 6.45 43 45 1.00 36 0.89 0.62 0.69 0.42 2015 2016 2017 2018F 2019F Op. Income [Rsbn] Adj. EPS [Rs] CIR [%] 1
FINANCIAL PERFORMANCE Placements and Funding grow by 18% and 16% respectively in FY-18 culminating in an LDR of 78%. Growing Segment B The emerging prominence of Seg B in FY-17 led to a shift in the composition of both Loans and Deposits. Between FY-13 and FY- 16, Seg B Loans has averaged 19% of total Loans but increased to 38% in FY-17. Similarly, Seg B Deposits has averaged 22% of total Deposits between FY-13 and FY-16 and increased to 31% in FY-17. As a portion of both Loans and Depos Seg B increased from 19% in FY-13 to 34% in FY-17. Figure 1. Loans & Depos SBM s Loans & Advances (Loans) endured a period of stagnation between 2011 and 2015, having grown at an annualized (ann.) rate of 2% from Rs64bn to Rs70bn reflecting a period of slow demand for credit amid an environment of excess liquidity persisting in Mauritius. In FY-16 and FY-17, SBM reacted by boosting its Segment B (Seg B), with Seg B loans growing by 49% and 143% respectively. Moreover, advances in overseas operations jumped by 2.9x to Rs9.6bn partly due to its expansion in Kenya through the acquisition of Fidelity Commercial Bank. Subsequently, SBM s loans surged by 47% which is its its biggest YoY increase in more than 10Yrs. Operating Income In line with slow growth in Loans and Deposits, SBM s Operating Income (Op. Inc.) remained fairly flat between FY-13 and FY-16. In FY-17, we have seen a shift in the Op. Inc. s components mix with Op. Inc. increasing by 17% driven by a 1.5x jump in Other Income (OI) derived from new operations in Trading instruments. On a H1-18 basis, Op. Inc stood at Rs4.0bn (+14%) boosted by 20% gains on both NII and NFCI which outweighed the absence of dividend income. We therefore expect Op. Inc to grow by at least 6% to Rs8.0bn in FY-18 on the back higher NII 2 and NFCI from grown in loans as well as a steady income stream from Trading operations. Figure 3. NII, NFCI & OI Figure 2. Market Share in 2013 & 2017 On the other side, Deposits & Placements (Depos) grew at 11% ann. this past decade with the biggest jump arriving in FY-17 at 30% to reach Rs146bn driven by both Seg A (+19%) and Seg B (+58%). Unsurprisingly, with Depos growing at a higher pace than Loans, Loan-to-Deposit Ratio (LDR) declined between 2011 and 2015, until the Seg B driven growth pushed LDR up to 77% in FY-17. On a H1-18 basis, Loans have grown at a slower ann. rate of 5% and Depo at 10% ann. resulting in an LDR of 75%. That said, given the drive into Seg B coupled with the acquisition of selected assets and matching liabilities of a 2 nd bank in Kenya, Chase Bank, which became effective on Aug 18 th 2018, we expect Loans and Depos 1 to Net Interest Income Net Interest Income s (NII) slow growth in recent years was the result of the decrease in Net Interest Spread (NIS) mainly due to i. the fall in rates in government and non-mur giltedged securities in which SBM increased investment at 22% ann. since 2013; and ii. the lower rates at which new credit was issued as a result of competitive environment amid tepid demand and prevailing excess liquidity. NII increased by 9% to Rs4.8bn in FY-17 its biggest increase since 2013 when it last grew in double-digits (11%) largely driven by the jump in Segment B led 1.5x jump in Loans & Advances. NIS shrunk from 4.9% in FY-11 to under 4.0% in FY-16 then further extending 1 We believe SBM Kenya will experience some pull-outs by Chase customers who have not had access to their accounts for months 2 Albeit with tighter net interest margins as a consequence of growth in prominence of Seg B lending which is non-mur denominated and carries lower lending rates A: AXYS Stockbroking Ltd, 6 th Floor, Dias Pier Building, Le Caudan Waterfront, Caudan, Port-Louis, 11307 2
its slide to 3.6% in FY-17 also mainly on account of its non-mur Seg B book. On a H1-18 basis, NII grew 21% at constant ann. NIS of 3.6%. Given, stable outlook for Mauritian Repo rates, the emergence of Seg B lending and added cost of funding from the recent issue of subordinated bonds, we forecast NII growth to slow down to 6% in FY-18, i.e yielding Rs5.1bn. Net Fee & Commission Income Net Fee & Commission Income (NFCI) has averaged 16% of total operating income since 2013 and grown at an ann. rate of 2% since FY-12. The main contributors to NFCI are Customer Fees, both retail and corporate, and Card Income. While card income has been fairly volatile since 2010, the recent surge is mainly driven by a jump in both Corporate and Retail banking fees as well as increase income from Non-Banking services such as Asset Management and Brokerage as part of SBM s premiumisation and diversification strategies. NFCI at Rs1.2bn (+18%) recorded its strongest growth rate since 2011 and is the highest ever to date. On a H1-18 basis, NCFI grew by 20% to Rs629M in-line with higher customer fees generated through increased lending. We forecast NFCI to grow by 10% to Rs1.4bn in FY-18 on the back of higher customer fees generated through increased lending. ii. As a consequence of a 2x jump in Depreciation & Amortisation charges relating to the new IT system Consequently, the Cost-to-Income ratio (CIR) which grew gradually over the years, increased to its highest rate in more than a decade excluding FY1-14 in which a exceptional Rs1.2bn was impaired at 45% in FY-17. In the 1 st 6-months of 2018, NIE grew by 24% to Rs1.9bn due to additional expenditure being incurred from projects and Kenya resulting in an even higher CIR of 48%. We therefore forecast CIR to stand close to these levels but under 50% in coming years then sliding to ~47% in the medium-term. Having grown by 5% from Rs2bn to Rs2.1bn in H1-FY18, we expect EBIT to dip slightly to Rs4.1bn (-3%) in FY-18 before picking up to Rs4.3bn in FY-19. Other Income Other Income (OI) is mainly driven by foreign exchange (FX), dealings in securities as well as the newly created desk which deals in financial instruments. FX income has been fairly volatile over the past decade but has become rather stable averaging ~Rs540M during the last 3Yrs. Likewise, income from sale of securities has been stable standing at Rs456M in FY-16 and Rs464M in FY-17. The main reason OI surged 55% in FY-17 to Rs1.6bn was the development of a new source of income stemming from dealings in financial instruments which stood at Rs516M against a mere Rs25M the previous year. For the first half of 2018, OI has fallen by 16% to Rs613M due to the absence of dividend income and reduced income from sale of securities which was partially mitigated by a further 15% jump in revenue from dealing in financial instruments. In-line with historical volatility of OI and the uncertainty in securities trading, we expect OI to remain well above its FY- 16 figure and remain stable at Rs1.6bn in FY1-18. Profitability Non-Interest Expense (NIE) has grown at an average 13% Year-on- Year over the last decade excluding 2014 & 2015 when systems related implementation costs [Rs1.2bn] were written off and induced volatility but the increase accelerated to 24% in FY-17 to reach Rs3.4bn. This surge in expenses was two-fold: i. Relating to a 16% (Rs223M) increase in staff costs relating to a fundamental change in HR policy in which the practice of offering time-limited employment contracts has been discontinued with the intent to better retain/attract talent; and Figure 4. Key Ratios Impairments Net impairments have averaged Rs670M between FY-13 and FY-16 except in FY-15 where SBM s impairments reached up to Rs1.9bn following BAI Group s collapse. In FY-17, impairments increased to Rs1.1bn due to increase in impairment losses from SBM s Indian Portfolio. Consequently, Net Impairment Ratio (NIR) which represents the Net Impairments as a percentage of Loans rose from 1.0% in FY-16 to 1.2% in FY-17, an increase of 21%. SBM s NIR has averaged 0.80% excluding FY-15 this past decade. However, SBM s rapid expansion in Seg B a relatively novel space for SBM appears to have resulted in some oversight. This is best exemplified by impairments of Rs737M (0.65% of average loans) in H1-18 against Rs428M (0.50% of average loans) in H1-17 which was exacerbated by a suspected fraudulent facility of $27M (Rs932M) which has also been fully impaired bringing total impairments in H1-18 to Rs1.67bn. SBM Bank s CEO has since resigned and SBM s Group CEO re-assured investors at their latest Earnings Presentation that this had been a wake-up call for SBM and that procedures were being reviewed so as to avoid similar mishaps in the future. Nonetheless, given that SBM s recent credit has been mainly Seg B driven, we expect NIR to remain high. We therefore take a conservative stance impairing at least 1.4% slightly above HI-FY18 s ann. 1.3% of its loan book on account of its foreign expansion and therefore growing overseas exposure. A: AXYS Stockbroking Ltd, 6 th Floor, Dias Pier Building, Le Caudan Waterfront, Caudan, Port-Louis, 11307 3
Profit after Tax SBM s Profit after Tax (PAT) has failed to register steady growth over the last decade with an ann. growth rate of just 2%. SBM registered four successive years of double-digit growth peaking in 2013 when PAT crossed the Rs3bn-mark thereafter halved over the next two years as a consequence of a retro-active systems related write-off in FY-14 and BAI-related impairment in FY-15. PAT recovered over the following two years to Rs2.6bn in FY-17, however HI-FY18 profits were decimated [Rs156M against Rs1.3bn in H1-FY17] by a deterioration of credit quality and a suspected fraud with respect to a facility of $27M. Given the higher project and staff related expenditure as part of SBM s strategic plan, its expansion into Kenya & India, and the short term deterioration of credit quality, we conservatively expect PAT in 2018 to stand at Rs1.1bn its lowest in a decade recovering thereafter but not crossing the Rs2bn-mark before 2022. entities, SBM Bank might find it increasingly difficult to lend to these ballooning groups albeit in a period during which SBM Bank is looking to recapture market share thus restraining the Bank s domestic loan book growth potential. Further, following an opportune merger or increase in stake to consolidate control, a large group could unwittingly find itself in a situation where its debt levels exceed such credit concentration limits and could thus force an early repayment of loans which would add further pressure on loan book growth and NII. That said, SBM takes a rather holistic approach with sector/client specific appetites such that the risk of such an event happening over the medium term is un-probable and thus deemed to be low. Figure 5. EBIT and PAT Risk Assessment Credit Concentration Construction sector which in our analysis include personal loans and exclude credit cards so as to enable comparative continuity for the period under review has constantly been the major contributor to SBM s loan book averaging 38% participation since 2011. In 2017, construction s loans reached Rs38bn [35%] representing one-third of total loans. SBM s lending to Tourism has been fairly stable ranging between Rs10bn and Rs13bn since 2011. However, Tourism sector share participation dropped from 18% in 2013 to 10% in 2017 due to a surge in loans deployed in financing Trade as well as Finance and Business Services (Fin. & Biz.) which jumped by 2.1x to Rs13.5bn and by 3.5x to Rs20bn respectively between 2016 anf 2017. Other sectors remained stable over the last 5 years except Professional sector which grew from Rs300M [0.4%] in 2016 to Rs1.8bn [1.7%] in 2017. BoM credit concentration guidelines limit single customer exposure to 25% of Tier 1 Capital (T1) and 40% to a group of connected entities which translate to Rs3.4bn and Rs5.4bn respectively for SBM Bank. Following a recent trend on the SEM whereby large conglomerates have been increasing stakes in associates/ subsidiaries and/or attempting to take over related/unrelated Figure 6. Credit Concentration 2013 & 2017 + NPL Credit Quality Prior to 2015, over half of SBM s Non-Performing Loans (NPL) appeared to be related to real estate a fraction which has dropped to about one-third in 2017. This specific improvement in terms of concentration is not due to a higher quality of real estate related (combination of Personal & Construction segments) but rather due to the emergence of NPLs in other segments led by Manufacturing, Other, Transport and Financial/Business Services. The NPL ratio has averaged 5% since 2015 against 2% in the preceding three years. That said, an NPL ratio of 2% appears to be fairly small given that the industry average NPL during that period according to BoM data stood at 3.5%. This has since deteriorated to 6.4% which suggests that SBM has increased provisioning to more appropriate levels. In recent years SBM has seen a surge in specific provisions, first relating to the collapse of the BAI group in 2015 and most recently with its international lending. The rapid expansion of Seg B and subsequent specific impairments suggests lapses in SBM s credit risk assessment processes. Consequently, we believe SBM s newest Seg B loans could be of inferior quality and A: AXYS Stockbroking Ltd, 6 th Floor, Dias Pier Building, Le Caudan Waterfront, Caudan, Port-Louis, 11307 4
might result in further specific one-off impairments in coming years. Any such provisions might come rather sooner than later as SBM is committed to fine comb its Seg B portfolio and take appropriate measures. On a brighter note, the fact that SBM s Group CEO comes from a risk background, and that management assured investors it was reviewing its lending process so as to avoid large specific impairments going forwards, we believe the quality of new credit will be superior. With respect to its recent acquisition of carved-out assets & corresponding liabilities in Kenya, a rather similar due diligence has been carried out to ensure that SBM s asset quality is maintained or enhanced. We therefore expect as slight deterioration in the quality of SBM s assets, which combined with the implementation of IFRS 9 standards is expected to result in higher provisioning levels. Overall Performance We have tabulated below SBM Holding s and SBM Bank s Scorecard which compare Actual performance (Act) against internal Targets (Tgt). SBM self-imposed targets are usually optimistic in terms of return, profitability and asset quality which have been rarely met over the last 3 years. Although loans growth target has been missed in 2015 and 2016; the 2017 target has been eclipsed by 4x from a targeted growth of >10% and actual growth of 41.5%. On the other hand, deposits growth is the indicator which have always been achieved since 2015 with latest deposits growth reaching 32.7% in 2017. This increase is expected to slow down as SBM expects moderate growth in deposits next year. In spite of recent growth in SBM loans and deposits book and regional expansion initiatives, the deterioration in credit quality and the heavy impairments incurred in Q2-18 is likely to result in SBM falling short of most of its return and efficiency ratios. 2015 2016 2017 2018 Target Actual Target Actual Target Actual Target Return ROA [%] ~ 3 10.3 > 2 1.6 > 2 1.5 > 1.6 ROE [%] > 17 7.3 > 15 10.0 > 15 10.5 > 12 Efficiency/ Cost : Income [%] < 45 52.6 < 42 42.5 < 42.5 44.8 < 46 Quality Net NPL [%] < 1.2 1.9 < 1.5 2.6 < 2 2.0 < 1.8 Revenue Profit [%] > 10 6.3 ~ 60 44.0 > 25 11.5 > 20 Figure 7. Evolution of Capital Base Capital Adequacy Following the re-structuring of SBM Bank into SBM Holdings and the issue of Tier 2 subordinated debt, SBM s Capital Adequacy Ratio (CAR) and Tier 1 Ratio (T1 CAR) jumped from 20% to 31% and from 17% to 26% respectively. Since, the figures been decreasing steadily to 20% and 16% at the end of 2017. Since, SBM issued new subordinated debt which drove CAR back up to 24% at the end of Q2-18 but T1 CAR decreased further to 15.5%. These remain above BoM s minimum regulatory limits of 13% (Basel III: 8%). The decline has been mainly a result of increasing risk weighted assets which have grown by 17% ann. since 2014 to Rs126bn in Dec-17. In Oct-17, rating agency Moody s kept SBM s Baa3 rating unchanged given stable outlook amid solid liquidity, comfortable capitalization and adequate profitability balance. However, Moody s considers risk of a large single borrower concentration, or any excessive risks arising from its ambitious expansion in India & Africa and government s reduced willingness or capacity to support the bank as potential downward pressures on rating. In spite of recent large specific impairments, Moody s outlook on SBM is likely to remain stable. We therefore deem the risk of a ratings downgrade to be medium-low. Loans Growth [%] > 10.5 4.6 > 12 5.0 > 10 41.5 > 10 Expenses Depo. growth [%] > 7 12.0 > 9 9.0 > 12 32.7 Table 1. SBM s Performance Scorecard CORPORATE STRUCTURE Overview SBM Holdings Ltd (SBM), in its present shape came about in 2013 wherein banking activities were segregated from non-banking activities such that The State Bank of Mauritius Ltd 3 (SBM Bank) became the main subsidiary within the Group rather than the overarching parent. Originally established post-independence in 1973 by Government as the bank of the people, SBM celebrates 45 years of existence in 2018. SBM originally embarked on the path to internationalisation in the mid-90s opening its 1 st overseas branch in Mumbai, thereafter starting operations in Madagascar before the end of the 90s-decade. This internationalisation had been fairly passive as exemplified by the combined share of Indian and Malagasy operations making up ~6% of SBM s assets and operating income in 2017. That said, the drive to grow overseas has been re-vitalised in recent years as demonstrated by a busy 2017 when SBM acquired distressed Fidelity Bank in Kenya, obtained a banking license to operate in the Seychelles, and became the 1 st ever foreign bank to obtain wholly-owned subsidiary status in India. In addition, SBM completed the purchase of carved out assets & liabilities of Chase Bank also in Kenya in Aug-18. The Group s strategy is to grow its 3 Now officially renamed as SBM Bank (Mauritius) Ltd A: AXYS Stockbroking Ltd, 6 th Floor, Dias Pier Building, Le Caudan Waterfront, Caudan, Port-Louis, 11307 5
presence in the region and to establish a strong presence in East Africa in order to drive cross border business across a broader portfolio of services offered. In 2017, ~96% of SBM s revenue from external customers was generated by its banking cluster of which ~97% was generated by SBM Bank. Moreover in FY-17, Segment B represented ~32% of SBM Bank compared to 19% a decade ago. footprint; with capacity building being the back bone of both initiatives. In terms of diversification of offerings, in addition to retail/private client focused investment funds/notes, SBM has introduced a securities/derivatives desk capable of offering hedges, and forwards to address requirements of its clients. The result was the 2-fold increase in income from trading to Rs1.08bn in 2017. Figure 8. Group Structure Business Model In 2016 SBM set up new initiatives with the aim to double its assets in five years while maintain high ROE. The execution of this strategy can be condensed down to the consolidation and diversification of it banking and non-banking operations both in Mauritius and regionally. In order to achieve this, SBM has overhauled its employment system to do the right thing, is ramping-up the full integration of its new software for optimal use, and intends to push for cross-selling of its offerings. In the light of recent impairments, management has decided to adopt a more prudent approach going forwards such that assets growth will be driven by quality rather than quantity. As for its internationalization efforts, these past few quarters have been highly eventful for SBM having obtained a wholly-owned subsidiary status in India the first of its kind for a non-indian bank as well as having received a banking license to operate in the Seychelles. The above initiatives coupled with a greater focus on cross-border deals has led to a surge in Segment B lending from 17% of Advances in 2015 to 38% in 2017 and which has been the primary driver of SBM s loan book growth. Furthermore, future loan book growth is likely to be driven by its Kenyan operations. SBM purchased a relatively small distressed bank (Fidelity) in 2017, then completed the acquisition of a carefully selected carved-out book 4 from Chase Bank Kenya in Aug-18; therein giving SBM Kenya a Tier 2 status with a network of 60 branches. Corporate Governance SBM is committed to attain and sustain the highest principles of corporate governance. Its board is made up of a diversified group of individuals experienced in accountancy, secretarial services, civil servants, as well as executives currently practicing in Real Estate, Consumer Staples, and a former executive from the finance industry but to name a few. SBM s 8-member board has a median age of 58. Six (6) [75%] of out its 8 members are classified by SBM as independent with zero [0%] women. The absence of feminine representation on its board is striking given that 57% of SBM s workforce more than half are women. Consolidation In terms of its domestic business, SBM has maintained its market share at ~20% of both lending & deposits offering mainly plain vanilla services to retail and corporates alike. SBM has thus restructured teams to offer better customer service and resolve issues more effectively with the intent to recapture lost corporate market share and make grounds in servicing Small and Medium Enterprises (SMEs). Further, the focus on cross-selling initiatives has driven SBM to revamp its Wealth Management arm as well as to launch/create several new funds, structured and leveraged products. SBM s board members are Mr Kee Chong Li Kwong Wing; Chairman of the Board; Mr Azim Fakhruddin Currimjee; Managing Director (MD) of F&B Cluster Currimjee Group and MD of QBL ; Mr Medha Gunputh; Permanent Secretary in the Ministry of Defence and Rodrigues; Maxime Hardy; General Manager at BROLL Property and Facilities Management Ltd; Mr Vidianand Lutchmeeparsad; Permanent Secretary of the Ministry of Finance & Economic Development; Mr Roodesh Muttylall; Chief Finance Executive at a Group operating in the hospitality sector; Mr Ramprakash Maunthrooa; Senior Advisor at the Prime Minister s Office; Mr Subhas Thecka; Senior Lecturer at Charles Telfair Institute. Diversification SBM s diversification strategy is two-fold: first to offer a broader range of services and solutions, and second to grow its regional 4 comprising both assets & liabilities A: AXYS Stockbroking Ltd, 6 th Floor, Dias Pier Building, Le Caudan Waterfront, Caudan, Port-Louis, 11307 6
second - behind MCB - as the most liquid stock on the Stock Exchange of Mauritius (SEM) with a 99.2% trade frequency over the last year. Figure 9. Board Composition Mr Li Kwong Wing has served many positions in the public sector including one as Advisor to the Minister of Finance, he has been a member of the board since Apr-15. Mr Currimjee has over 25 years of experience in Industry, first managing a large textile organisation, then leading a significant F&B business for the last 16 years, he has been appointed to the board in June-16. Mr Gunputh has a long career as a public servant and has been a member of many boards, he joined SBM s board in Feb-15. Mr Hardy has over 35 years of experience across various key sectors, he joined in June-15. Mr Lutchmeeparsad has gathered diverse experience in various field such as Total Quality Management, Management of Change, Implementation of ISO 9000, Organisational Structures and Strategic Management among others, he joined the board in June- 15. Mr Muttylall was the Financial Controller in the hospitality sector for nearly 10 years and joined in June-15. Mr Maunthrooa spent more than 20 years in the port sector and joined in June-15. Mr Thecka has knowledge and expertise in both financial and marketing fields, he joined in June-17. Figure 10. SBM's Top Shareholders [%] MARKET PERFORMANCE Trading Stats, Performance & Liquidity In CY-2017, SBM made up 8% of TMT second to MCB which singlehandedly made up 25% of TMT. During this period, total value traded was Rs1.4bn with over 7% of its total shareholding being traded. In terms of foreign trades, SBM accounted for 8% again second only to MCB which made up 44% of all foreign trades on the SEM in CY-17. Senior Management SBM s Group Chief Executive Officer is Mr Andrew Bainbridge who joined in January 2018. Prior to joining SBM, he was the Group Head, US Supervisory Remediation Programme, the Global Head of Commercial Clients and the Chief Risk Officer for the Western Hemisphere for Standard Chartered Bank. Shareholding SBM is held by the National Pension Fund (NPF) at 22.3%, State Insurance Company of Mauritius Ltd (SICOM) at 17.1%, Government of Mauritius (GOV) at 5.8%, National Saving Fund (NSF) at 3.1%, Development Bank of Mauritius (DBM) at 2.2% and State Investment Corporation Ltd (SIC) at 1.6%. Other shareholders include SWAN Life (SWANL) at 2.4%, The Bank of New York Mellon (BNY) at 1.6% and The Africa Emerging Markets Fund (AEMF) at 1.2%. In spite of a tighter shareholding, SBM ranks Figure 11. SBM s Market Performance The BAI scandal in 2015 where SBM increased impairments to Rs1.9bn led to Net Foreign Sales (NFS) of Rs1.4bn for CY-15, plunging the share price from by 32% Rs10.20 on 5-Jan-15 to Rs7.10 on 31-Dec-15. SBM continued its slump bottoming-out at Rs6.30 in Apr-16 before recovering slowly by the end of 2016, beginning of 2017 on the back of improved results. As at 30-Dec-17, SBM gained 13% YoY which compared unfavorably to MCB s 27% YoY and SEMDEX s 22% YoY. The market appears to have been pricing in A: AXYS Stockbroking Ltd, 6 th Floor, Dias Pier Building, Le Caudan Waterfront, Caudan, Port-Louis, 11307 7
the effect of non-flattering media coverage as well as a long spell without a Group-level CEO. On a total return basis, SBM returned 19% YoY and -5% over 3Yrs compared to 31% and 16% for MCB and 25% and 5% for the SEMTRI respectively. Since the start of 2018, SBM s performance had been marked by short-lived plunges triggered by negative media coverage, until the announced $27M fraudulent facility dragged its stock price to 52Wk-Lows. SBM s 12% drop YTD is significantly worse than MCB s 2% drop and the SEMDEX s 1% gain against a flat-ish ALCAPEX 12 (+0.2%). Foreign Participation Since 2017, SBM recorded Net Foreign Sales (NFS) every year with foreign shareholding decreasing from 25% on 31-Dec-11 to 10% on 31-Dec-17. In 2015, SBM registered record outflows to the tune of Rs1.4bn which is mainly explained by i. Moody s downgrade of SBM deposit rating from Baa1 to Baa3 ii. A generalised global asset re-allocation from Emerging to Developed Market SBM s NFS totaled Rs934M over the last 2 Years. Between the start of 2018 and 20-Apr-18, net outflows stands at Rs177M. VALUATION We value SBM through a forecasting algorithm which includes macro inputs such as GDP growth and Benchmark interest rates which we apply to recent observable trends to forecast growth in placements, deposits, and P&L line-items. Following the recent turn of events, we altered a few inputs such as the CIR which stands close to 50% against the preceding 5-Years 42% average; and an Impairment Ratio >1.5x its 5Yr-average 5 of 0.95%. Using the prevailing ratios 6 for a comparable set of peers obtained from Bloomberg, we applied a PER of 11x, PDR of 23x and PBV of 1.3x in our market ratios method; we ignored the cost of debt in the Dividend method and applied a 7% premium to the GMB 10Y; and computed the WACC to stand at 9% by applying a 7% premium the 10Y GMB and using 1.7% as the effective cost of funds for the Cash Flow method. Method per Share [Rs] Value [RsM] Market Ratio 9.10 23,502 Cash Flow 8.16 21,059 Dividend 5.01 12,929 Consensus 7.59 19,597 Figure 12. NFS & Foreign Shareholding Our consensus valuation for SBM is thus computed to stand at Rs7.59 which represents a 15% upside on its closing price of Rs6.58 on 30-Aug-18 and therefore upgrade our rating from ACCUMULATE to BUY for the stock. 5 Excluding 2015 which was skewed by BAI-Group loans 6 Identical to ratios we applied to MCB A: AXYS Stockbroking Ltd, 6 th Floor, Dias Pier Building, Le Caudan Waterfront, Caudan, Port-Louis, 11307 8
APPENDIX A Key Financials & Ratios SBM 2013 2014 2015 2016 2017 2018F 2019F Net Interest Inc. [RsM] 4,017 4,050 4,253 4,383 4,768 5,051 5,498 Net Fee & Comm. Inc. [RsM] 1,001 915 1,029 1,053 1,240 1,369 1,431 Income Stmt Data & Ratios Other Inc. [RsM] 1,213 1,295 974 1,010 1,565 1,603 1,585 Operating Inc. [RsM] 6,230 6,261 6,255 6,446 7,572 8,023 8,514 Non-Int. Exp. [RsM] -2,107-3,152-2,270-2,742-3,388-3,955-4,230 EBIT [RsM] 4,123 3,108 3,985 3,705 4,184 4,068 4,284 Cost-to-Income Ratio [%] 33.8 50.4 36.3 42.5 44.7 49.3 49.7 PAT [RsM] 3,001 1,868 1,608 2,309 2,575 1,092 1,794 Adj PAT [RsM] 3,001 1,868 1,608 2,309 2,575 1,092 1,794 EPS* [Rs] 1.2 0.7 0.6 0.9 1.0 0.4 0.7 Loans [RsM] 70,563 68,137 69,993 76,271 112,026 131,756 140,825 Loans Growth [%] 4.9-3.4 2.7 9.0 46.9 17.6 6.9 Balance Sheet Data & Ratios Depos [RsM] 83,234 92,379 105,033 111,853 145,540 169,153 176,535 Depos Growth [%] 4.5 11.0 13.7 6.5 30.1 16.2 4.4 LDR [%] 84.8 73.8 66.6 68.2 77.0 77.9 79.8 LDR (Extended) [%] 99.3 101.0 100.2 99.5 95.5 96.3 98.1 Assets [RsM] 111,861 125,602 136,162 146,896 194,021 219,944 229,850 Liab [RsM] 92,518 103,529 113,974 123,091 168,857 193,333 201,460 Equity [RsM] 19,343 22,074 22,188 23,805 25,165 26,610 27,269 NAVPS* [Rs] 7.5 8.5 8.6 9.2 9.7 10.3 10.6 NIS [%] 4.5 4.3 4.1 3.9 3.6 3.2 3.1 CAR [%] 20.4 31.4 28.3 25.7 20.0 0.0 0.0 Key Ratios Tier 1 Ratio [%] 16.9 25.7 21.7 19.9 15.9 n.a n.a Imp. Ratio [%] 1.0 0.9 2.8 1.0 1.2 2.3 1.6 NPL Ratio [%] 0.0 0.0 0.0 0.0 0.0 0.0 0.0 ROE [%] 15.5 8.5 7.2 9.7 10.2 4.1 6.6 ROA [%] 2.7 1.5 1.2 1.6 1.3 0.5 0.8 PER [x] 8.9 14.1 11.4 7.4 7.5 17.7 10.8 Valuation Metrics PEG [x] 1.4 142.7 142.7 1.4 8.2-1.6 1.1 PBV [x] 1.4 1.2 0.8 0.7 0.8 0.7 0.7 DPS* [Rs] 0.3 0.5 0.3 0.4 0.4 0.2 0.3 Div Yield* [%] 2.6 4.4 4.2 6.0 5.3 2.5 4.2 Payout Ratio [%] 23.7 62.2 48.3 44.7 40.1 45.0 45.0 * Fully Diluted Note: EPS & PER are calculated using the 'Adjusted Attributable PAT' A: AXYS Stockbroking Ltd, 6 th Floor, Dias Pier Building, Le Caudan Waterfront, Caudan, Port-Louis, 11307 9
APPENDIX B Calculations Methods Bottom-line profit figures, e.g. Profits after Tax, Attributable Earnings, and EPS among others, have all been adjusted for nonrecurrent exceptional items. AXYS Ratings All per Share metrics or calculations requiring the No. of Shares have been computed using a single constant. AXYS has used the total number of issued shares thus implying full dilution. Our valuation reached from a consensus derived using three (Ratios, Cash Flow and Dividends) different valuation methods whose forecasting algorithms incorporate Monte Carlo methods. Loan to Deposit Ratio (LDR) & LDR Group level figures used Return on Equity (ROE) & Assets (ROA) ROE Market Share Deposits & ROA Deposits as per BoM s Maintenance of Cash Ratio by Banks APPENDIX C Valuation Forecasts All the raw forecasted metrics tabulated below are on a per share basis. The discount factor uses a 7% risk premium over risk-free rate and CPI index computed using our long-term inflation forecasts. EPS DPS NAVPS 2017 1.0 0.4 9.7 2018F 0.4 0.2 10.3 2019F 0.7 0.3 10.6 2020F 0.6 0.3 10.9 2021F 0.8 0.3 11.2 2022F 0.9 0.4 11.6 2023F 0.8 0.3 12.0 2024F 0.7 0.3 12.4 2025F 1.1 0.5 12.8 2026F 0.8 0.4 13.4 2027F 0.9 0.4 13.9 Credit Loans as per BoM s Consolidated Statement of Sector-Wise Distribution of Credit to the Private Sector Net Interest Spread NIS & About our Methodology At AXYS we believe that no single method is best to determine the Fair Value (FV) of company and that steady monotonic growth rates used in most models are unrealistic. This is why we derive the FV of a company by using a linear combination of up to four valuation methods which include: Market Ratios, Cash Flow, Net Assets and Dividends. In addition, our algorithms include Monte Carlo methods to help simulate bumper/difficult years which over the long run offer added realism when compared to stable monotonic growth rates. For best results, we have to forecast over longer periods and should a major spike or fall in earnings in say year seven occur, this shouldn t be interpreted literally, but as part of our valuation algorithms running over a decade to provide an adequate valuation of the company. We nevertheless strive to have the most accurate forecasts over a two-year horizon. Where FY N-1 represents the average values between FY N and A: AXYS Stockbroking Ltd, 6 th Floor, Dias Pier Building, Le Caudan Waterfront, Caudan, Port-Louis, 11307 10
REFERENCES SBM Holdings Ltd. Audited Financial Report 2017. <https://www. sbmgroup.mu/documents?title=financial%20report>. [Apr 2018]. SBM Holdings Ltd. Annual Reports 2016. <https://www. sbmgroup.mu/sbm-ar-2016/index.html>. [Apr 2018]. SBM Holdings Ltd. Annual Reports 2007-2015. <https://www. sbmgroup.mu/documents?title=annual%20report>. [Apr 2018]. AUTHORS Bhavik Desai Head of Research Alexis Corson Investment Analyst SBM Bank (Mauritius) Ltd. Audited Financial Report 2017. <https://www.sbmgroup.mu/documents?title=financial%20report>. [Apr 2018]. SBM Bank (Mauritius) Ltd. Annual Reports 2007-2016. <https://www.sbmgroup.mu/documents?title=annual%20report>. [Apr 2018]. Bank of Mauritius. Monthly Statistical Bulletins. <https://www. bom.mu/publications-statistics/monthly-statistical-bulletin>. [Apr 2018]. DISCLAIMER AXYS Stockbroking Ltd has issued this document without consideration of the investment objectives, financial situation or particular needs of any individual recipient. Recipients should not act or rely on any recommendation in this document without consulting their financial adviser to determine whether the recommendation is appropriate to their investment of this document. This document is not, and should not be construed as, an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. This document has been based on information obtained from sources believed to be reliable but which have not been independently verified. AXYS Stockbroking Ltd makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. AXYS Stockbroking Ltd and its officers, directors and representatives may have positions in securities mentioned in this document, or in related investments, and may from time to time add to or dispose of such securities or investments. AXYS Stockbroking Ltd is a member of the Stock Exchange of Mauritius and is licensed by the Financial Services Commission. A: AXYS Stockbroking Ltd, 6 th Floor, Dias Pier Building, Le Caudan Waterfront, Caudan, Port-Louis, 11307 11