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. We still 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 FY2013 BV.
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 will 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 has raised capital for the bank. 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 stakes
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.
Based on the current total market capitalisation of AFFIN of
RM4,528.6m, BEA’s 23.5% stake in the company today will be worth as much as
HK$2.62b (RM1.06b). This will generate an investment gain of 41% (including a
15% currency translation gain). The return will be even higher if based it on
our target price of RM4.30/share at 1x FY13BV, where the stake would be worth
99% higher at HK$3.71b (RM1.51b).
AFFIN’s M&A
valuation should be worth between 1.2x to 1.4x BV if we benchmarks it to
the two recent transactions in the market i.e. Hong Leong Bank’s (“HLBANK”)
acquisition of EON Bank at 1.4x BV and RHB CAPITAL Bhd’s (“RHBCAP”) proposed
merger with OSK IB at 1.4x BV also. Nonetheless, we believe a 1.2x BV valuation
would be justifiable for AFFIN (a 14% discount to the 1.4x BV), after adjusting
the BV/share for its low provisioning
coverage of 68.5% (industry’s average is at 91%). Besides, AFFIN also has a higher-thanaverage impaired loan
ratio of 2.9% and a lower-than-average ROE of 9.0%.
With or without the
M&As angle, we still believe AFFIN offers a favourable risk and reward
proposition. AFFIN’s potentially higher credit risks have already been
priced in by the 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..
Source: Kenanga
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