Fundie tips significant re-rate for stock as bank grows PNG market share

The real GDP of Papua New Guinea is forecast to grow by 5.4% in 2022, symbolising a strong post-COVID recovery after a difficult few years for the country. It is forecast to maintain between 3% and 4% real GDP growth through to 2027. All of this economic activity needs to be facilitated, and there is an innovative company capitalising on the opportunity.

Towards the end of FY22, diversified financial services provider Kina Securities (ASX: KSL) was running a P/E ratio of 6.2x and ended up delivering a 12.4% dividend according to their June 30 closing price. Romano Sala Tenna, a veteran portfolio manager, stated that “ordinarily, anything above 9% dividend yield would have us running for cover; it’s one of your classic value trap signs”.

However, after significant analysis, Mr Sala Tenna and the Katana Asset Management team were confident that Kina Securities would be able to continue to pay high yielding dividends and were impressed with its earnings per share (EPS) growth.

Mr Sala Tenna said he’d like to see 19% EPS growth during FY23, and believes a significant re-rate in the stock may be triggered as the market “grows in confidence that they can continue to pay out that sort of yield”, resulting in the P/E ratio rising closer to the financial services industry average of 16.9x back in May.

As part of forming a sustainable competitive advantage, Kina Securities is the only bank to offer fully digital onboarding in PNG. It is also the only bank that allows clients to view their superannuation balance, and that has implemented customer analytics and artificial intelligence for monitoring transactions and potential money laundering.

At a time when Australia’s Big Four banks are reducing their exposure to the country for compliance reasons, Kina Securities has been continuously growing its market share.

Mr Sala Tenna said he expects this opportunity will continue to expand, as ANZ recently exited a large part of its PNG portfolio and Westpac was trying to do the same. In fact, 80% of the country is considered ‘unbanked’ – hurdled by geographical and security concerns.

The portfolio manager stated the bank has a “very, very strong balance sheet” when referring to its capital adequacy ratio (CAR), which stood at 22% for H1 CY22, against the PNG legal requirement of 12%.

A key indicator of a bank’s stability and solvency, a CAR is calculated as the amount of capital a bank possesses relative to its risk-weighted assets. Risk-weighted assets mainly refer to the outstanding loans a bank has lent, weighted by the level of risk of loss they pose to the bank.

Another important banking ratio to watch is the net interest margin (NIM), a key profitability indicator that represents the interest charged on money lent out, minus interest paid on deposits and money borrowed.

In Australia, the NIM of the major banks has descended from around 2.5% just after the GFC to below 2% so far in 2022. In PNG, where risks are higher but rewards are too, the NIM has mostly fluctuated between 6% and 7.5% post GFC. Kina Securities achieved a NIM of 6.2% in H1 CY22, and even hit 7.5% in H2 CY20.

As a full-service bank, Kina Securities also offers funds management, stockbroking and financial advice services. It had $4.1 billion funds under management as at H2 FY22. Morgans Financial had a buy rating on it with a price target of $1.29 during July.

Click here to view more videos from Romano Sala Tenna’s The Insider: Meet the Fund Manager session.

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