Company Overview: MyState Limited (ASX: MYS) is engaged in the provision of banking, trustee and managed fund products and services. It operates through its wholly-owned subsidiaries MyState Bank Limited and TPT Wealth Limited. The Banking division under MyState Bank Group offers products including lending, transactional savings accounts, fixed-term deposits and insurance products. The Wealth Management division provides funds management and trustee services, and is conducted by TPT Wealth Limited.

 MYS Details

Decent Rise in Profits Aided by NIM expansion: MyState Limited (ASX: MYS) provides banking and trustee services to its clients. The market capitalisation of the company as on 03 May 2021, stood at ~$406.43 million. In view of the decent financial performance in H1FY21, the company has decided to declare a dividend of 12.50 cents per share during the period. It did not pay any dividend for its FY20 results in order to bolster its financial position under uncertain economic conditions.  

During H1FY21, the company delivered a resilient financial performance with core earnings growth of 18.8% to $26.4 million when compared to the pcp. NPAT grew by 12.6% to $17 million during the period. The improvement in results were aided by decent growth in lending, better cost of funding, and efficiency gains from investments in technology. There was also an improvement in the Net Interest Income (NIM) to 1.94% in H1FY21, from a level of 1.82% in H1FY20, supported by lower funding costs. The return on average equity compared well with its regional bank peers, and stood at ~9.94% in H1FY21.

H1FY21 Financial Performance (Source: Company Reports)

Quality Loan Book: The company’s total loan book grew by 5.5% as of 31 December 2020, on the previous corresponding period. There was an improvement in the home loan book and it grew at 1.7x on 31 December 2019. The home loan applications and settlements were up by 10% and 24%, respectively, on the pcp.

Book Composition (Source: Company Reports)

Growth in FUM in TPT Wealth: In this segment, net FUM grew by 3.2% to ~$1.103 billion during the end of H1FY21, from 30 June 2020 levels. There was a decrease in the wealth revenue owing to lower trustee fees, and the funds management revenue was impacted due to the spread of the COVID-19 pandemic. The Group has outsourced the investment management for growth funds to Mercer.

FUM as of H1FY21 (Source: Company Reports)

Improved Economic Environment to Aid Growth: MYS has written-back net bad and doubtful debts of $0.4 million in H1FY21, reflecting a reduction in the forward-looking overlay due to an improvement in the economic environment. It has also reported arrears to be well below the benchmarks for regional bank peers and other major banks.

Favourable Funding Mix: The company has reported that there has been a continued fall in the retail funding costs on the back of lower wholesale funding rates. It has also witnessed substantial growth in the award-winning Bonus Saver Account with a growth of over 210% on 30 June 2020, driven by the digital acquisition of new customers.

Top 10 Shareholders: The top 10 shareholders together form around 11.24% of the total shareholding, while the top 4 constitute the maximum holding. Dimensional Fund Advisors, L.P.  and Select Managed Funds Ltd.  are holding a maximum stake in the company at 1.72% and 1.33%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: The company reported an improvement in the Net Interest Margin performance to 1.94% in H1FY21, from a level of 1.82% in H1FY20. This was on the back of a decrease in wholesale funding costs. It delivered a loan growth of 1.8% in H1FY21, compared to 1% in H1FY20. The total debt of the Group was at $1,274.1 million as of 31 December 2020.

Growth Profile and Profitability Metrics (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Risks: The company’s line of business exposes it to credit risk, which arises from the loans and advances on its balance sheet. In order to mitigate the risk, the company holds collateral against the loans in the form of a mortgage charge over the property. However, the credit quality might be impacted due to the vulnerability of the assets to conditions such as economic or political factors. The Group is also prone to the risk of change in the rate of interest, as it might have an impact on the Net Interest Margin of the firm. It is also exposed to the vulnerability of the COVID-19 induced volatility in the economic environment.

Outlook: As per MYS, there has been a decent rebound in the Australian economy after the initial phase of the pandemic, and it expects consumer and business confidence to remain positive going forward. It is focused on customer outcomes and plans to increase investment in its marketing activities. It further plans to simplify the business in the banking space, through the usage of automation and robotics, and enhance the user experience of its customers. In the wealth segment, it plans to invest in scalable wealth management and trustee products and systems, and also deliver growth through mainland distribution.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: MYS reported a reduction in the cost-to-income ratio by 340 bps to 61.5% in H1FY21, on the back of decent growth in revenue. As per ASX, the stock of MYS is trading slightly above its average 52-weeks’ levels of $3.550-$5.420. The stock of MYS gave a positive return of ~12.09% in the past six months and a positive return of ~2.94% in the past one month. We have valued the stock using a P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight premium to its peer median P/E (NTM trading multiple), considering the decent increase in the Net Interest Margin & Income, increase in FUM in the wealth management space and expected benefits from investment in technology. For the purpose, we have taken peers such as Australia and New Zealand Banking Group Limited (ASX: ANZ), Bank of Queensland Limited (ASX: BOQ), Bendigo and Adelaide Bank Limited (ASX: BEN), to name a few. Considering the expected upside in valuation, decent increase in core earnings and NPAT, acquisition of new customers and favourable funding mix, we recommend a ‘Buy’ rating on the stock at the current market price of $4.540, up by 3.181% as on May 03, 2021.

MYS Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

Note: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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