SAWAD - Recovery depends on ability to issue bond

SAWAD expects to see an ease in credit cost and losses on repossessed vehicles, resumption of loan expansion after issuing a new bond and improving loan yield from a resumption of loan expansion in 4Q24. We maintain our UNDERPERFORM rating with an unchanged TP of Bt37 as we expect weak earnings growth in 2025 and prefer to wait for better liquidity.

Easing credit cost and losses on repossessed vehicles. SAWAD saw a slight easing in NPL formation in 3Q24, thanks to the government’s Bt10,000 cash handout, and expects to complete sizable write-offs by 1H25. We maintain our 2024F credit cost at 2.05%, expecting 4Q24 credit cost to be fairly stable QoQ but lower YoY. The company expects 2025F credit cost at ~1.8% in 2025 vs. our conservative forecast of 2%. It expects loss on repossessed vehicles to touch bottom, with fewer units for sale but larger loss per unit caused by the worsening vehicle condition.

Loan growth depends on ability to issue bond. SAWAD’s loans contracted 3% QoQ as it prefers to keep cash on hand to service debt, meaning any loan growth will depend on its ability to issue bonds. It is planning to issue Bt2.5bn in debentures in 4Q24, which will allow it to resume expanding loans. We expect loan growth of 1.3% QoQ (Bt1.3bn) and 0% YoY in 4Q24. It targets loan growth at 10-15% in 2025, if the climate for bond issuance returns to normal. New loan extensions will primarily be title loans rather than motorcycle hire-purchase.

Expects recovering loan yield. A sharp 52 bps QoQ fall in 3Q24 loan yield was due to: 1) a rundown of high-yield (>30% pre-22% cap) motorcycle HP and 2) lower EIR from less new lending (higher EIR booked in the initial period of a loan than in the latter). SAWAD expects loan yield to recover when it resumes expanding loans. It also raised interest rate on motorcycle HP from 18% to the 22% ceiling to enhance loan yield. We expect its cost of funds to continue rising until 1H25 and on this basis expect NIM to be flat QoQ in 4Q24 and rise 18 bps in 2025.

Expect small earnings growth. We expect 4Q24 earnings rise 3% QoQ and 6% YoY on a QoQ pickup in loan growth, QoQ flattish NIM and QoQ stable credit cost. We expect 5% growth in earnings (-3% for EPS) in 2025, underpinned by 7% loan growth, an 18 bps rise in NIM and a 5 bps reduction in credit cost.

Maintain Underperform with unchanged TP. We keep our Underperform rating with an unchanged TP of Bt37 (based on 1.6x PBV or 11.2x 2025F PE).

Risks. 1) Asset quality risk from an uneven economic recovery and falling used vehicle prices, 2) NIM risk from rising bond yield, 3) rising competition from banks, 4) regulatory risk and 5) ESG risk from the court case and market conduct.