“Market-perform” rated / $75.00 Price Target / HQ = Columbia, SC / $1.7 Bil. Mkt. Cap.
We are making modest changes to our EPS outlook on SSB-South State Corporation in 2015 (i.e., a one penny haircut) and in 2016 (i.e., a $0.10 increase) to reflect timing of loan discount accretion from acquired Loans as well as revised credit costs and related one-time items that we exclude from Core Earnings. We note that Street consensus has moderately declined for 2015 from $4.40 to $4.28 but high expectations for future EPS growth in 2016 and beyond continue to boost the stock with a strong P/E and price-to-tangible book ratio that compares well with high-growth community and regional banks nationwide. Our rating is “Market-Perform” due to modest upside.
The fact that SSB is expected to earn about a 1.25% ROA and 15% ROTCE in each of the next two(2) years remains a positive for the stock which trades at 270% of tangible book value and 15.7x our estimated 2016 EPS. Investors should be aware of 10-Q disclosure showing a healthy drop in accretable yield (i.e., future loan discounts which are due to be recognized into future NII-Net Interest Income and NIM-Net Interest Margin). This surprised us and is related to changing the prepayment speeds that SSB expects and what was experienced in 1Q-2015. This means future NIM could fall, but we already factor this in our forward NIM forecast.
SSB shares have moderate upside in the near-term, yet they continue to beat the Bank sector indices year-to-date 2015 and since Fall 2014 when stock prices suffered a retreat on Energy-concerns that did not effect SSB’s business but did alter investor sentiment towards Bank stocks.
We feel the P/E in the mid-16x area remains appropriate on projected 2016 EPS and the mid-teens Deposit Premium also reflects the strong franchise enjoyed by the company as well as its excellent prospects for future growth. It is fair to expect SSB to engage in future M&A transactions (as Buyer), but we feel the company is not in a hurry to cross above the $10 Billion Asset threshold and incur additional compliance and Dodd-Frank charges on interchange fees. However, it does enjoy a superb currency which gives the equity market high confidence that it can make accretive acquisitions to enhance future EPS.