MBF Holdings Value unlocked after sale?

We believe the proposed disposal of its card business is timely with an attractive valuation. In our scenario analysis, MBF Holding (“MBFH”), is offering an upside in range of 20%-74% depending on its future corporate developments. For the immediate term, the share price could have reflected the recent disposal. However, should there is any capital repayment exercises going forward, the stock could be rerated, in our view.

A timely disposal? We think its recent proposed disposal of its card business is timely given that the business operates in a highly competitive market and MBF Cards have to compete with bank-backed card issuers. As MBF Cards depends on bank borrowings as well as debts raised through the capital market, its ability to continue to raise funds will increasingly be more and more challenging, causing the business to reach a bottleneck. Meanwhile, in the absence of deposit-taking, its cost of funds would be generally much higher causing it to charge substantially higher rates than its peers. As such, we believe that the decision to dispose MBF Cards, a 100% subsidiary of the company, provides an opportunity for it to unlock the value of its investment in MBF Cards at an attractive valuation.

The proposed disposal is expected to result in a one-off handsome gain of RM384m for MBFH based on the audited financial statements of MBFH for the financial year ended 31 December 2011. This translates into an additional book value per share of RM0.67/share (or RM0.46/share assuming full conversions of the 265m warrants). At the current price of RM1.00, it will trade at a discount to its adjusted book value (“BV”) of RM2.47 by 60%.

Value-searching. We believe the current discount above is not justifiable as the existing MBFH’s market capitalisation of RM570.1m would already be lesser than the total RM623m cash to be received from the proposed sales of MBF Cards. That means that, with the current price, investors would be getting the remaining assets (from other businesses) of MBFH for free. These assets could be worth as much as RM0.65/share or even more as this valuation only implied a 3.2x FY10/11 PER. Recall that MBFH still has some businesses in Papua New Guinea as well as Fiji involving in Automotive, Agriculture, Retailing, Property and Shipping sectors. Coupled with the total cash proceeds from the disposal of RM1.09/share, the valuation of MBFH should be pegged at RM1.74 (by adding in fair value from other businesses), implying 74% upside from here.

Nonetheless, we believe the current existing price offers an upside of 20% by applying a holding company and cash company discounts of 40% to its adjusted BV. The discount rate of 40% is justifiable due to uncertainty over potential new asset injections and capital repayment (or special dividends). Under scenario two, however, if there is a capital repayment exercise, the share price should react positively and offers a good trading opportunity in our view. Based on our observations, the discounts between company value and share price will become narrower should the plan of capital repayment is unveiled.

Source: Kenanga