Data X And Typhoon AI Will Improve Future Cost Management And Asset Quality

Key Takeaways

• Strategic focus on AI and digitalization is expected to enhance efficiencies, improving cost management and asset quality for better margins and earnings.
  
• Growth initiatives like Home Credit Vietnam acquisition and virtual banking aim to boost revenue and enhance long-term profitability.
  
• Economic slowdown, rising household debt, and increasing NPLs could pressure SCB X's revenue, credit quality, and profitability amidst an uncertain interest rate landscape.

Catalysts

Engages banking, consumer and digital finance, and platform and technology businesses in Thailand and internationally.

• SCB X's strategic focus on enhancing efficiencies through AI deployment and digitalization is expected to improve cost management and asset quality, potentially leading to better net margins and earnings.
  
• The company plans to leverage its AI capabilities, including its Data X infrastructure and Typhoon language model, to improve cash collection efficiencies and underwriting processes, which could enhance revenue and net margins.
  
• SCB X aims to increase profitability in its Gen 2 businesses (CardX and AutoX) by emphasizing asset quality improvement and credit cost reduction, which could result in higher earnings.
  
• The expected improvement in asset quality management and credit cost reduction, particularly in CardX, suggests that the company anticipates a healthier financial position, supporting stronger earnings.
  
• SCB X is focusing on strategic growth initiatives, such as the acquisition of Home Credit Vietnam and the establishment of a virtual banking platform, which could drive revenue growth and enhance long-term profitability.

SCB X Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming SCB X's revenue will grow by 11.7% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 33.9% today to 27.9% in 3 years time.
• Analysts expect earnings to reach THB 50.5 billion (and earnings per share of THB 14.9) by about March 2028, up from THB 43.9 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 11.1x on those 2028 earnings, up from 9.5x today. This future PE is greater than the current PE for the TH Banks industry at 7.9x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 9.08%, as per the Simply Wall St company report.

SCB X Future Earnings Per Share Growth

Risks

• The global economic growth is predicted to slow, with growth rates lower than expected, potentially impacting SCB X's revenue from international operations and investments.
  
• The Thai economy's growth is expected to be moderate due to factors such as weak domestic demand, a high base in exports, and potential negative impacts from geopolitical tensions, impacting SCB X's domestic revenue and earnings.
  
• Household debt issues remain a concern, which could pressure private consumption and the effectiveness of fiscal measures, thereby affecting SCB X's loan growth and credit quality.
  
• The U.S. Federal Reserve's potentially fewer rate cuts than expected, along with other major central banks' divergent monetary policies, could lead to an uncertain interest rate environment impacting SCB X's net interest margins.
  
• Increasing NPLs, especially in the SME, housing loan, and auto hire purchase segments, could pose risks to SCB X's asset quality and result in higher credit costs, affecting its net margins and profitability.

Valuation

• The analysts have a consensus price target of THB128.143 for SCB X based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of THB140.0, and the most bearish reporting a price target of just THB109.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be THB181.0 billion, earnings will come to THB50.5 billion, and it would be trading on a PE ratio of 11.1x, assuming you use a discount rate of 9.1%.
  
• Given the current share price of THB124.5, the analyst price target of THB128.14 is 2.8% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.