Earnings Report /
United Kingdom

ASA International: Forecasts trimmed on currency headwinds, higher costs; TP lowered to GBP3.50; Hold

    Rahul Shah
    Rahul Shah

    Head of Financials Equity Research

    Tellimer Research
    23 September 2019
    Published by

    Long-term ROE potential has dimmed. We now price the shares off 37.9% ROE versus 40.3% previously. Our sustainable ROA projection is 6.3% (7.0% before). The key drivers of these changes are: 1) the increased cost intensity of the business (more investment in branches and technology relative to new volume); and 2) the growing weight of India, which is a fundamentally less profitable market (price/margin controls).

    H1 19 results were softer than we had expected. Net profit of US$16.1mn was down by 2% yoy. Revenue generation was robust (+18% yoy), but operating costs rose more sharply (+32% yoy). Loan quality has deteriorated slightly (PAR>30 rose to 1.0% from 0.7% at end-18), while branch and customer activity was also worse than forecast (Table 1).

    Net profit forecast reduced by 10% in 2019 and by 16% in 2020 due to: 1) lower volume growth (on lower per-customer and per-branch activity assumptions); 2) higher operating cost growth, on accelerated branch openings and higher IT spend (Table 2). We retain our Hold rating, but lower our target price to GBP3.50, from GBP3.90. ASAI trades at 13.0x 2019f PE, 4.6x PB and 2.2% DY.

    Pakistan faces twin headwinds – higher interest rates, weaker PKR. At end-June, Pakistan accounted for 16% of ASAI’s loans, 19% of its clients and 15% of its branches. A weaker PKR (down 34% yoy) hits this market’s earnings contribution, but also directly erodes ASAI’s capital base. Further, interest rates have risen 325bps points over the past year, which lifts funding costs, squeezes margins and pressures loan quality.

    India is seeing good growth, but margins are lower than elsewhere. At end-June, this market accounted for 20% of loans (29% including off-book balances), 28% of clients and 19% of branches. However, the presence of loan yield and net interest margin caps (23.5% and 10%, respectively) is a key profitability constraint, as are growing signs of asset quality stress. Although India margins are not disclosed, South Asia’s net interest margin in H1 19 was 15.8%, down from 18.8% in H1 18 and compared with 25.1% for the group in H1 19. The rising weight of India in the business is offsetting the positive margin impact of growth in Africa.

    Cost growth reflects faster branch openings and IT investment. Key drivers of the 32% yoy growth in H1 operating costs include a doubling of the IT department’s headcount and tax-related costs in the Philippines. The roll-out of tablet devices to all loan officers and investment in biometric security and real-time transaction capability will allow the firm to better support its clients’ transition to digital money, but this comes at a cost.

    GBP weakness is supportive. The UK’s protracted Brexit saga has contributed to a 5% decline in GBP over the past year, to US$1.24; any further weakness would be supportive for ASA International’s share price. A stabilisation in ASAI’s operating currencies (notably PKR and GHS) would also help lift the firm’s USD-denominated financial performance; US rate cuts could be helpful in this regard.