Reaffirm ‘buy’ on Power Finance Corporation (PFC) and raise our 6-month target price of R385 per share (earlier R248) as we now value the stock at a P/B of 1.4x on our FY16e BVPS (previously 1.25x for FY14e), to reflect a reduced risk we see for its power sector lending activity. We expect several positive policy decisions on the power sector in the coming months, which should improve PFC’s loan growth and asset quality prospects and drive a re-rating of the stock. Our FY16-17e EPS are 7-12% higher than the Bloomberg consensus, as we are more bullish on PFC’s loan growth and NIM.
PFC trades at a 1.1x P/B based on our FY16e BVPS of R269, which is at about a 15% discount to its past-5-year mean P/B. The market’s lingering concerns about PFC’s asset quality and loan growth outlook are currently reflected in a lower P/B for the stock compared with its ROE, but we believe these are overdone and that the stock will re-rate over the coming months.
We forecast PFC to deliver strong net profit growth over FY15-17, driven by our projections of a 17.5% loan CAGR and a stable NIM for this period. We forecast its net profit to rise at a CAGR of 20% over FY15-17. PFC looks well-placed to generate loan growth over FY15-17 without diluting its equity further given its strong capital adequacy ratio. Thus, we forecast the company to maintain a high ROE of 21% in FY15 and about 22% in each of FY16 and FY17.
By Daiwa
