The New Criterion: The Cheapest Bank on the ASX

Tim Boreham

Despite PNG’s shaky economy, bancassurer Kina Securities is in good shape. For individuals who aren’t, MyFiziq has just the app to help them shed their excess flab.

Kina Securities (KSL) 86c

Which bank is the most “unquestionably strong” of its ASX-listed cohorts on a capital adequacy basis and also produces the highest net interest margins and sector-leading lending growth?

Not the Commonwealth Bank, which is all about what went unquestionably wrong with its money-laundering affair rather than how unquestionably strong its balance sheet is.

Don’t look at the other Four Pillars either. Look further north – no, not at the Bank of Queensland but even further upwards to the Port Moresby based Kina Securities.

On the raw comparisons, Kina should be the poster child of the banking sector: its capital adequacy stands at a whopping 30%, compared with the local average of around 12%. Despite the drag of holding so many assets as capital, the bank’s return on equity is a creditable 13%.

In calendar 2016 Kina generated loan growth of 62% to 606m kina ($242m), with a net interest margin of more than 8%. In comparison, CBA last week reported 5.6% loan growth (on a much bigger book of course) and on an across-the-board margin of 2.1%

The PNG economy may be perennially dodgy but that hasn’t overly affected Kina’s loan quality: impairments are now running at 0.01%, compared with the CBA’s higher but still solid 0.15%. This is despite Kina’s book being skewed to more risky business lending – 69% of the book – with housing lending accounting for only 17%.

(We’re picking on the CBA because it’s the biggest bank and the only one of the Big Four to report June balance date results).

Kina listed in July 2015 at $1 a share, the product of stockbroker and wealth manager Kina Group merging with Maybank, PNG’s fourth biggest bank. The bank competes with Westpac, ANZ and Bank South Pacific, which makes for an Aussie-style oligopoly.

Kina’s wealth-management operations hold 6.2bn kina of funds under management and 5.6bn kina of funds under advice, which is not insignificant in the PNG context.

Ahead of its August 23 half-year results Kina last week pre-announced an underlying profit of 10m kina, 50% lower. The statutory profit of 3m kina reflected a one off 7m kina lease termination payment.

Having lost its US offshore correspondent bank for foreign exchange purposes last year, Kina has established a new one with Commerce International Merchant Bankers. The reduction in first half earnings was attributed to lower foreign exchange income because of the termination of the former relationship, which implies a strong reliance on trading income.

Kina trades on an earnings multiple of less than ten times, a sharp discount to the Australian sector average of around 14 times.

There’s a fundamental reason: while the company might be well run its earnings are 100% exposed to PNG, a nation reliant on a few resource projects for economic growth. On official figures GDP grew by an average 4.14% in the decade to 2016, but in 2016 the growth slowed to 2.6% in 2016 and the economy is forecast to grow by 2.7% this year. But some commentators claim the island nation is now in recession.

The talking point of this month’s disputed election – which saw controversial PM Peter O’Neill returned to power – was the country’s budget blowout and its uncomfortable public debt that stands at 34.5% of GDP.

While the kina (as in the currency) has depreciated in recent years, it is still considered too high for the country’s good.

Kina Securities is a quirky and oft-overlooked member of the ASX banking club. But with higher returns there are also risks and the country’s parlous economy explains why.

Then again, a money laundering scandal is something you would expect to afflict a third world bank and not our leading financial institution.

In June, Kina said long-serving CEO Syd Yates would step aside in favour of Greg Pawson. As a former Westpac head honcho for the bank’s south East Asia pacific operations, Pawson is at least familiar with the travails of operating in the region.

MyFiziq (MYQ) 6c

The last thing your columnist wants to know is the true gruesome extent of his middle age spread, but there are plenty of exponents of the body beautiful who want an accurate measure of weight loss.

MyFiziq has devised an app that not only measures overall body weight more accurately than the standard BMI (body mass index) or tape measure, but also measures specific bodily regions across 72,000 data points. “It can even adjust for breathing,’’ CEO Vlado Bosanac says.

The app is based on creating an on-screen avatar, in effect an updated pic of the user’s body.

The app has been available on the Apple store for some months now, with 8500 users to date.

But the company realises that no-one (except for Apple itself) makes money from direct consumer apps, with MyFiziq’s real prospects based on ‘business to business to consumer’ partnering deals.

A former competitive bodybuilder, Bosanac knocked on the door of 27 fitness-related companies to solicit interest. “I can put my hand on my heart and say there wasn’t a company that said they didn’t get it,’’ he says.

In June the expended shoe leather paid off and the company signed a deal with Singapore’s Gold Quay Capital, which entails Gold Quay injecting $2m of cash into MyFiziq and then spending a further $3m to fund a version of the app for medical diagnostics.

The key target markets are health and life insurers, who would love to receive the updated and reliable vital statistics of their customers for risk assessment purposes (Australian health insurers can’t price on health risks but the rules are different elsewhere).

Doctors and hospitals are also obvious targets.

On the fitness side the company also cites global brands “whose interests are aligned with the product”. These include Nike, UnderArmour (sports clothing), Adidas/Reebok and Asics and one can assume they are potential partners.

MyFiziq burnt $766,000 in cash in the June quarter and is yet to record any revenue.

The company raised $6m in its August 2015 IPO at 20c apiece and now has $1.2m of cash, but with a $1.5m down payment from the Singaporeans due any day. The company also expects a “substantial” R&D refund.

Bosanac says the company doesn’t need to pass the hat around and – like the fitness freaks – is in good shape despite the languishing share price.

But a deal with a global fitness giant would really get investors’ hearts pumping.

Tim Boreham authors The New Criterion

Tim.boreham@independentresearch.com.au

Disclaimer: The companies covered in this article (unless disclosed) are not current clients of Independent Investment Research (IIR). Under no circumstances have there been any inducements or like made by the company mentioned to either IIR or the author. The views here are independent and have no nexus to IIR’s core research offering. The views here are not recommendations and should not be considered as general advice in terms of stock recommendations in the ordinary sense.


Tim Boreham

Many readers will remember Boreham as author of the Criterion column in The Australian newspaper, for well over a decade. He also has more than three decades’ experience of business reporting across three major publications.

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