Public Bank - OUTPERFORM - 2 Jul 2012

We reiterate our OUTPERFORM rating on Public Bank Berhad (“PBBANK”) with an unchanged target price (TP) of RM15.60 based on 2.9x FY13 P/BV, implying 13.0x PER of FY13E.  We think it is the right time now to turn more positive on the bank due to rising preference of investors for defensive stocks. This trend is  set to be a major rerating catalyst for PBBANK going forward given the expectation of rising dividends for the bank, better free cash flow generation, consistent ROE and high earnings visibility, which pushing for a rerating of the bank in 2H12 in our view.  This is likely to make PBBANK a favourite among investors in 2H2012 in our view.  The managements’  conservative approach in managing the bank has made it a consistent performer even when things go wrong in the industry or market. 

Paying for protection. The valuation on defensive stocks is on the rise again over the last couple of months and some of them have been hitting historical highs. We think that the ongoing Europe’s sovereign debt crisis, which was a key driver of the slower economic growth in 2011, was the main reason.   Recent macro data have turned weaker globally, putting at risk earnings estimates. The resulting market volatility has been favouring defensive stocks. Our analysis shows that stocks with high dividend yield, earnings certainty and positive earnings revisions have outperformed the rest. For the YTD, defensive stocks (for both consumer and telco sector) have outperformed the KLCI with PER trades above +1SD above the mean and P/BV +1SD. Relative to other defensive stocks, PBBANK is trading at a substantial discount. As such, rising demand for defensive stocks should see a catch-up play for PBBANK with its rising dividends, better free cash flow generation, consistent ROE and high earnings certainty. This is likely to make PBBANK a favourite among investors in 2H12 in our view.  

Dividend champion. PBBANK is the cheapest and the most laggard of the defensive stocks given its undemanding 11.5x FY13 PER and 2.55x P/BV. We like PBBANK as a dividend yield stock in the view that PBBANK has consistently been rising dividends in tandem with earning growth that forms an attractive investment thesis. Its better free cashflow generation (after the Basel III announcement), higher ROE and high earnings certainty make PBBANK even more suited as a defensive stock for the current market conditions. The bank’s solid profit track-records reflect the management’s efficient approach in managing the largest retail and SME bank in Malaysia. The bank has also built a large pool of defensive and less-cyclical loans as well as cheap  and liquid deposit portfolios, where it currently enjoys a significant market share. We believe that this is the right time to turn more positive on the bank given the current defensive market as evidenced from its  consistent performance in 2008-09 (during the global financial crisis) and its recent good result announcement. 

Rating and TP maintained. Our OUTPERFORM rating is maintained as the current share price implies a 17% total upside  (with a 4% net div yield) as measured against our TP of RM15.60. At this TP, the P/BV valuation would be pegged at 2.9x and trading at 13.0x FY13 earnings.

Source: Kenanga