Malaysian Building Society - Making good progress

Malaysian Building Society Berhad (“MBSB”) is continuing its process of restructuring its legacy NPLs.  We view this restructuring effort as a significant positive boost for the stock. We are reiterating our OUTPERFORM rating on MBSB with an unchanged target price RM2.70.  

Expecting another two legacy loans to be restructured by yearend. MBSB is in the process of negotiating its NPLs with more than a dozen interested parties. It targets to restructure about RM350m, representing one third of its net NPLs (1Q12 group NPLs were at RM1.29b), by end of the year. With the completion of this NPL restructuring, this will bring its NPL ratio down to 5% or below. Meanwhile, its net NPL ratio has improved from 8.5% in 4Q11 to 7.3% in 1Q12.                   

                                                                                                                                                            

More one-off gains? Under the current market environment, restructuring legacy NPLs such as abandoned projects may be tough, and management has highlighted that will not sell or restructure if it incurred losses.  Most of the legacy assets are already valued on mark-to-market basis and hence the revival of these projects will not result in any substantial one-off gains.  

So far so good. YTD, the group has successfully written back two legacy accounts and divest one non-core subsidiary. The first project to be written back will be the Taman Kenanga project, which is expected to be relaunched in September 2012 while the other project  is a debt settlement agreement of RM120m to revive and complete the Pantai Plaza project in Bangsar. It has also disposed a 100%-owned subsidiary, Gadine S/B, for a cash of RM56.2m.

Prospect remains bright. We view the restructuring of its legacy NPL exposure as a significant positive boost for the stock given that this will materially reduce the risk of any further provisioning charges and free up more capital for its future lending capacity. However, in the short-term, there are still concerns over the Eurozone economy  and global market uncertainties. Nonetheless, we believe the group is well consolidated and we expect the local civil service to maintain its stable employment status. All in all, the prospect for MBSB remains bright.

OUTPERFORM maintained.  We are maintaining our target price of RM2.70 based on a targeted P/BV of 1.7x over FY13 BV of RM1.60. Our target price of RM2.70 also implies 7.1x and 6.0x to our FY12 and FY13 EPS estimates, respectively. At the current level, the  stock offers a potential capital upside of 10%. Together with an additional dividend yield of 3.8%, this brings the potential total return to approximately 14% over the next 12 months. Its ROE of 28.1% remains one of the highest among financial stocks. 

Source: Kenanga