MTC is going to issue a 4-year social bond worth US$335mn with an interest rate of 6.875%, which is much higher than expected. We thus lift our assumed cost of funds 9 bps for each of 2025 and 2026, expecting its cost to funds to rise 10 bps in 2025 and gradually ease from 2026 onward. We cut our earnings forecasts by 3% for 2025 and 4% for 2026. This, however, does not change its lead position in the sector in terms of earnings growth, with earnings now forecast to grow 18% in 2024, 23% in 2025 and 23% in 2026. We maintain our Outperform with a cut in TP to Bt56 from Bt58.
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MTC – Issuing high-cost US$ bond
Event: Issuing US$ bond. According to Bloomberg, MTC is going to issue a 4-year social bond worth US$335mn carrying an interest rate of 6.875% at the end of September. For the first time, MTC has been assigned an international credit rating at BB- and BB by S&P and Fitch, respectively, 2-3 notches below investment grade. According to MTC’s IR, the reason behind the issuance of the US$ bond is to diversify its source of funds and enhance its L-T funding sustainability.
Impact: Rising cost of funds. The 6.875% cost of the US$ bond is higher than expected and well above its 2Q24 funding cost of 4.1% and the 4.95-5% coupon rate on the domestic 4-year debentures issued in August. We thus raise our assumed cost of funds by 9 bps for each of 2025 and 2026. We expect cost to funds to rise 10 bps in 2025 and then gradually ease from 2026, even after factoring in the expected policy rate cut of 50 bps in 4Q24 and 50 bps in 1H25.
Potential mitigation as an upside. We see the potential to mitigate the impact from: 1) potential cost savings via an upgrade in its domestic credit rating and
2) the possibility of raising lending interest rates. Its first-time domestic credit rating by Fitch is “A-“, which is higher than the ”BBB+” assigned by TRIS. An upgrade in domestic credit rating should cut the cost of domestic bond issuance by ~100 bps. MTC does have room to raise lending interest rates to offset the expensive US$ bond. SAWAD and TIDLOR raised their lending interest rates in 2H23 and 1H24 by >100 bps, but MTC kept its lending rates unchanged.
Cut earnings forecast. We cut our earnings forecast by 3% for 2025 and 4% for 2026. Even after this, MTC will lead the sector in terms of earnings growth at 18% in 2024, 23% in 2025 and 23% in 2026. The expectation of good earnings growth is supported by decent loan growth and an expected reduction in credit cost.
Maintain Outperform rating with a TP cut. We maintain our Outperform rating with a cut in TP to Bt56 from Bt58, based on 2.7x PBV (derived from 18% L-T ROE, 9.9% cost of equity and 5% L-T growth) or 16.7x PE for 2025F.
Risks. 1) Asset quality risk from an uneven and slower-than-expected economic recovery, 2) credit cost risk from falling used car prices, 3) rising competition from banks, 4) regulatory risk and 5) ESG risk from market conduct.