Prime Car Management: Leveraged fleet (stays HOLD)

We maintain our HOLD rating on Prime Car Management (PCM) and reduce our 12-month price target (PT) from PLN 36.7 to PLN 33.0, implying 10% upside potential. We remain HOLDers of the stock on its 7-8% dividend yield over 2017-19E, one of the highest in our financial stocks universe. However, we believe that further fleet expansion and growing leverage may require a more conservative approach towards dividend distributions in the future. Consequently, we assume a gradual drop in payout ratios over 2017-19E (75/70/50%). Overall, we expect PCM to deliver only a 9% earnings CAGR over 2017-19E and an 8.9-9.8% ROE. On our estimates, PCM trades at 2018-19E P/Es of 8.5-7.6x (a 2-14% discount to the international vehicle marketers and services providers). Not only should PCM’s ROE remain significantly below its peers, but it should also fall below the median for the Polish banks, on our estimates.
Dividend yield may look attractive, but growing leverage is a key concern. In 2016, PCM’s dividend payout reached 78% of the consolidated net profit (vs. its dividend policy of up to a 100% payout). For 2017-18E, we assume a payout ratio of 75-70%, respectively. However, for 2019E, we reduce our payout ratio to 50%. The main reason for the relatively lower payouts is the potentially increasing leverage. We assume that the number of leased vehicles will increase by 7-8% over 2017-19E, which should lead to an increase in D/E to 3.6x in 2019E. Overall, we see the balance sheet as stretched, which is a signal of a potential decline in dividends in the medium term, in our view.
Financial margin may rebound in 2018E, but might not benefit fully from rate hikes. We believe that the positive effect of rate hikes in 2018-19E is likely to be limited as the company will probably need to lower its margins to maintain its market share. On the other hand, a focus on retail clients might have some positive effect on leasing margins, if the company manages to acquire retail customers via e-commerce. Furthermore, we believe that higher financial expenses will affect the financial margin negatively in 2018-19E. We expect the financial margin to drop by 5% yoy in 2017E and increase by 7-11% over 2018-19E, driven by fleet expansion.
9% earnings CAGR and ROE below 10% not attractive, in our view. We expect PCM to deliver PLN 40m in net profit in 2017E, and improve by 6% and 11% over 2018-19E. In our view, the 2018-19E bottom line could suffer from higher COR and a normalisation of the depreciation margin. The ROE could reach 9.1% in 2018E (up from 7.9% in 2016) and improve to 9.8% in 2019E. Such a delivery would fall short of the target of over 11% in 2019E, according to the company’s strategy.
Risks: a drop in dividend payout due to growing leverage; a decline in leasing margins during rate hikes to maintain market share; a possible slowdown in fleet expansion; a potential takeover.