KSL, Kina, is a major PNG bank. I have been looking at the business for a while. My initial attraction to the business is the very good dividend yield. Its a business that has probably suffered somewhat from the home bias that is prevelant with ASX investors, investors are very nervous about businesses that operate offshore and the inherent australian racism likely increases the impact. So a bank for brown people, overseas is not investible for many. This means that even if one believes the business trades at a discount to value, it can be a very long time before the market changes its perception. (I think of UOS which has inarguably been dirt cheap all its listed life due to the mix of home bias and racism.)
In the cases of businesses like this I think one has to consider how you are going to get paid, its unlikely to be from capital appreciation as the business quality grows, because the price will always significantly lag the real value, its also not going to be from multiple expansion as it will also lag for the same reasons, so in the short to medium term I think dividends, M&A & buybacks become the most likely way to realise value.
In the case of buying a position for the SMSF then, the case really depends on the level of confidence I can develop for the dividend yield to continue to be superior. The challenges are multi-faceted, firstly I have no experience with or knowledge of how to value banks, the sort of metrics i use like FCF yield, DCFs, ROIIC, are not nearly as useful as in other sectors. Secondly KSL has recently had a large CR raising its share count by nearly 60% thereby creating very significant dilution - but also what look to be better opportunities for growth.
Last FY the dividend was 9.2c the share price prior to covid impact was around $1.40 and has recovered to be around $1 prior to the CR whereby it has dropped to 80c. If we simply extrapolate with no growth at all, then the dividend will be about 5.2c and if we buy at 80c thats a yield of 7%.
Without being able to fully understand the financials of a bank like KSL seems less important if one can have a reasonable level of conviction that it will continue to pay a dividend yield of at least 7%.
Probably the biggest risk I can see is the possibility that KSL embark on a large and expensive acquisition - and there have been rumours of Westpac wanting out of the whole South Pacific. KSL did acquire the ANZ operations in PNG last year and that seems to have been a remarkably smooth and successful acquisition for KSL with the benefits already dropping to the bottom line. Another risk is poor capital allocation through buybacks at inflated prices, but given the current discount to value that seems unlikely. Increasing payout ratio is another risk, but its fairly conservative now at under 70%.
I am revisiting KSL, it had run up as high as $1.15 recently, this followed the acquisition of the south pacific Westpac business which was well recieved by the market. It has fallen back to the low 90c range, partly i suspect based on the worsening Covid situation in PNG.
My valuation range is around $1.80, I am comfortable that looking at the past 6 years the ROIIC are superior to my hurdle rate and that should translate into a rerate at some point and in the meantime the very strong divvy yield should continue.
Premortem -
3 years on and the SP is still languishing around $1, despite solid performance from the business, it continues to be an overlooked business on the ASX with investors unable to get comfortable with owning a small pacific bank. Luckily the dividend has grown over that time and has made the investment worthwhile on its own.
3 years on and the share price is at all time lows at 70c, the Westpac acquisition turned out to be an expensive mistake and growth slowed in PNG as KSL had picked the low hanging fruit already. Continued perception of sovereign risk depressed the price even further and divvy yield dropped below 5%.
3 years on and the SP is now $2, KSL has consolidated its place as a significant bank in the South Pacific, dividends have grown strongly.
Probalistically, I think scenario A is a 30% event, B a 20% and C a 50% so 33c + 14c + $1 for an expected value of $1.47
Bought 21739 at 92c. 30/3/21
Why will this business be around in 10 years? - Because banks are still going to be a thing in 10 years, especially in small nations like PNG, Fiji etc. There will be disruption in financial services, but banks benefit from some of this and it doesnt make them disappear. also been around for 35years
