We cut our target price by 12% to R250. We value the core lending operations on a two-stage residual income model, for which we assume an income CAGR of 17%, a dividend payout ratio of 27%, a cost of equity of 15.47% and a terminal growth rate of 5%.
After the sharp rise in NPA in Q3FY14, we believe incremental efforts will shift towards recoveries, and growth will take a back seat. Higher opex and credit costs and lower growth will significantly affect earnings.
The gross NPA ratio is now at 4.8% a 12-quarter high. While there could be some reduction in GNPA in Q4FY14, driven by recoveries and write-offs, the reduction is unlikely to be as high as in the past. Given the relatively young age of GNPA, MMFS will need to make significantly higher provisions for writing off the assets this will further affect profitability.
Also, Q1 of every fiscal year tends to see the sharpest rise in NPA for MMFS. Additionally, this year there are national elections in April-May 2014 during which cash collections could be affected. So, its highly likely that NPA could rise again in Q1FY15.