Malayan Banking - DRP plan likely to continue

-  We are maintaining BUY on Malayan Banking Bhd (Maybank), with an unchanged fair value of RM9.80/share. This is based on an ROE of 14.8% FY12F, which translates into a fair P/BV of 2.1x.

-  Maybank had earlier announced that the subscription rate for its latest dividend reinvestment plan (DRP) is 88.5%.This was in line with the previous tranche’s take-up rate of 86.1%.  

-  Recall that the final GDPS of RM0.36 comprises an electable portion of RM0.32 (net DPS basis is RM0.24), which can be elected to be  reinvested in new ordinary shares in accordance with Maybank’s DRP. The remaining portion of GDPS of RM0.04 (RM0.03 net of taxation) will be paid in cash. The DRP price was earlier set at RM8.00. 

-  The subscription rate of 88.5% was in line with our forecast of a 90% subscription rate. 

-  The new shares issued numbered 202.9mil, which increased the share base by 2.6% to 7,842.3mil from 7,639.4mil. 

-  We have fine-tuned our forecasts, based on confirmation of new shares to be issued, but our ROE forecast is relatively unchanged at 14.8% FY12F. 

-  Assuming there was no DRP plan for this tranche of final dividend, we estimate ROE would have been 15.1%. Further, our forecast book value would be lower at RM4.59/share FY12F instead of the current RM4.67/share, given that the equity base would not be affected by new share issue. 

-  But, if assuming no DRP plan for this tranche of dividend, our fair value would be upgraded marginally to RM10.00/share from RM9.80/share. This is because of the theoretically higher ROE, leading to a higher P/BV fair value rating of 2.2x instead of 2.1x, which offsets the effect of lower book value.     

-  Looking ahead, the company still has a large Section 108 tax credit remaining of RM1.9bil, which will have to be utilised by December 2013. This means that Maybank will have to pay up to RM0.99 in GDPS in order to fully utilise the section 108 tax credit. Thus, we expect Maybank to continue with the DRP plan.

-  We maintain BUY. We believe key rerating catalysts from hereon are:- (a) improvement in asset quality, which will provide comfort that loan loss provisioning will likely be lower (b) better-than-expected ROE; and (c) better-thanexpected dividend.

Source: AmeSecurities