Affin Holding Berhad - OUTPERFORM - 07 June 2012

We reiterate our OUTPERFORM rating on AFFIN Holding (“AFFIN”) with an unchanged target price of RM4.30 (based on 1.0x FY13 P/BV, implying 11.7x PER of FY13E).  BEA is said to have explored options to retain capital, including the sale of its non-core assets according to a few reports.  Any sales could include its 23.5% investment stake in AFFIN, in our view.  

It was mentioned that Bank of East Asia (“BEA”) is finding ways to replenish its capital to sustain its growth over the medium term by selling its non-core assets. BEA has a core tier-1 capital ratio of 8.5% as of Dec 2011, which is at the lower end of its peers’ range. BEA would need HK$6.0b to get to the 10% core tier-1 expected by the consensus.

We understand that BEA has been disposing its non-core and less profitable assets over the last two years, which raised capital for itself. For instance, on 10 May 2012, the  US Federal Reserve approved the disposal of BEA’s US business to ICBC. This transaction was first announced on 23 Jan 2011, which saw BEA disposing its 80% stake in BEA USA to ICBC for a consideration of US$140.2m (HK$1,086.5m).  An earlier transaction in 2010 saw BEA disposing its 70% interest in BEA Canada to ICBC (completed on 28 Jan 2010) for C$80.2m (HK$589.2m).

Disposal of such stake signals a M&A ahead? As such, we do not discount the possibility that BEA could also dispose off its equity investment stake in AFFIN, where it owned a 23.5% stake as at Dec 2012.  We believe a potential sale would be good news for AFFIN’s share price. This is because it could spur speculative interest in the stock due to any potential M&A talks. 

However, with or without the M&As ankle, we still believe AFFIN offers a favourable risk and reward proposition.  AFFIN’s potentially higher credit risks have already priced in by existing discount in its valuation. With a reasonable 9%  ROE and its undemanding valuations (FY13E: 10.2x PER, 0.7x P/BV), there is room for its earnings to improve.  Its current valuation at FY13 P/BV multiple of 0.7x with an estimated ROE of 9.1% is overly pessimistic.  

All in, we believe AFFIN presents a good and under-appreciated investment proposition. We see room for further expansion in its valuation multiples with improving operating metrics in the coming years. Note that our TP of RM4.30 is only based on a targeted 1.0x its FY2013 BV.

Source: Kenanga