BIMB Holdings - OUTPERFORM - 19 June 2012

We reiterate our OUTPERFORM rating on BIMB Holdings (“BIMB”) but with a higher  target price (TP) of RM3.60 (based on 1.7x FY13 P/BV, implying 14.7x PER of FY13E earnings).  A successful re-rating of Syarikat Takaful Berhad (“STM”) will also benefit BIMB’s valuation. Current trading price of RM3.01 works out to an undemanding entry price of just 1.36x BV into its 51%-owned  Bank  Islam.    As  such, we believe BIMB is deeply undervalued and we do not discount the possibility of some corporate actions by management to unlock its value. BIMB continues to be our dark-horse pick in the banking sector.

Having outperformed the market over the last six months, Syarikat Takaful Malaysia Berhad (“STM”), a 65%-owned subsidiary of BIMB Holdings Berhad (“BIMB”) has almost tripled its market capitalisation to RM904m from RM326m in Dec 2011, currently trading at a forward consensus PER of 12.9x  FY13 earnings and at 1.6x P/BV.  The successful re-rating of STM above is likely to benefit BIMB’s valuation in our view. As it is, BIMB’s share price is already up by 25% since our initiation in April.  

We believe that BIMB is deeply undervalued. Our mark-to-market analysis of BIMB’s investment in STM suggests a total current unrealised gain of RM274m. Its 65% stake in STM works out to a value of RM0.55/share with the remainder contributed by Bank Islam, its 51%-owned subsidiary as well as RM108m from the other assets category.  Adjusting for STM mark-to-market valuation, this works out to an entry valuation of just 1.36x P/BV into 51%-owned Bank Islam, a 25% discount to its banking peers’ average of 1.8x. 

We do not discount the possibility of potential corporate actions by management to unlock its value. Our view is supported by the recent Bank Islam’s managing director Datuk Seri Zukri Samat comments in the media where he said that the company is searching for a better proposal to unlock its value with the possibility of Bank Islam potentially assuming BIMB’s listing status. We believe this is a better structure to avoid a holding company discount disadvantage in its valuation. This proposed structure is not new in Malaysia and has been proven to be successful and effective. LPI Capital and Public Bank that controlled by Tan Sri Teh Hong Piew, for one have separate listings and have been trading at premiums to their respective peers. In the event of value being unlocked in the banking business as highlighted above, both entities will also be able to avoid  any conflict of interest. Besides, investors will then also have a choice to invest directly in either the banking or insurance entity compared to just in the holding company. 

We are raising our target price to RM3.60 (from RM2.90 previously) based on a higher targeted multiple of 1.7x FY13 book value per share of RM2.10 (from 1.4x previously). We believe any potential corporate actions mentioned above could act as a re-rating catalyst for the group. On the operating side,  we believe its 12% ROE target is highly achievable despite the current gloomy environment. We also like the stock as its may achieve an asset quality similar to its peers in 2-3 years time on better management of its assets. We expect to see better asset quality as well as earnings visibility from the bank going forward. A progressive reduction in credit costs may also boost its profitability.

Source: Kenanga