SAMP’s 1Q CY19 net profit of LKR 2.1bn and an EPS of LKR 7.22 saw a 24.6% YoY (-20.6% QoQ) drop driven mainly by a hefty impairment charge (LKR 3.8bn) and a large increase in taxes. On the other hand, sluggish credit growth across the industry was reflected in SAMP’s results as well, which saw the loan book expanding by only 1.1% QoQ. The Easter attack and the subsequent events have changed our investment case notably, and we expect elevated impairments, high NPLs and slow credit growth to weigh on growth in CY19E. We believe it will be challenging for SAMP to attract full subscription given the current weak market conditions (we assume 60%). With the slow market momentum and the industry headwinds weighing down earnings in CY19E, our target price for SAMP moves down to LKR 145.00/share (+5.8% upside; +13.0% TSR), and we downgrade to HOLD.
Surging impairment costs weigh on earnings; no respite in CY19E. Impairments marked a 71.5% YoY increase in 1Q CY19 coming largely from SME exposure, and continued weakness in construction sector which resulted in credit cost rising to 220bps vs. 164bps in CY18. While the government has started to release payments to the construction sector, we note that the repayments have not started accruing to the banks. In addition, given SAMP’s exposure to income-sensitive sectors such as trading (21.5% of the loan book) and manufacturing (15.9%), we believe impairments would remain elevated throughout CY19E, in contrast to our assumption before the Easter attacks.
Asset quality continues to see pressure; tourism exposure to delay recovery. NPL ratio rose to 4.87% at the end of 1Q CY19 (1.2ppt QoQ) indicating that the NPL stock has increased by 33.5% QoQ. As discussed above, SAMP’s exposure to sectors expected see soft demand in CY19E would lead to additional NPLs, in our view. In addition, SAMP has the largest exposure to tourism sector in our coverage universe (9.1% of the loan book). While a debt moratorium is in effect this year for the sector, we believe tourist arrivals would only see a turnaround in 15-18 months, along with a recovery in cashflow. Hence, we expect SAMP would see a longer NPL cycle, with a recovery in CY21E.
Slow loan growth across the industry to continue through CY19E. SAMP’s loan book expanded 1.1% QoQ, marking a significant slowdown, reflecting the industry-wide trend. Management indicated that the weakness was broad-based and was driven by low business and consumer sentiment. We note that this sentiment has worsened since Easter attacks. Given the low economic activity, and our expectations of slowing consumer spending (see Easter attack Impact note) we lower SAMP’s credit growth to 7.0% for CY19E.
We cut our TP to LKR 145.00 and downgrade to HOLD. SAMP currently trades at 0.5x CY19E BV, at a significant discount to the historic average. Given the weak momentum in the market and the industry headwinds which would weigh on earnings in CY19E, we do not expect a major re-rating. We cut our TP to LKR 145.00/share (+5.8% upside; +13.0% TSR) and downgrade to HOLD. Key upside risks to our view include a better-than-expected recovery in NPLs, leading to lower impairments.