Affin Holdings Berhad - 1H12 above expectation

Period  2Q12/1H12

Actual vs. Expectations 1Q12 PAT of RM306.8m was marginally above the consensus’ forecast (55%) and that of ours (58%).

Dividends           No dividend was declared.

Key Result Highlights

The 2Q12 net interest income improved significantly by 4.4% QoQ (& 3.9% YoY) supported by a positive growth in gross loans by 4.1% QoQ (& 16.4% YoY).

Meanwhile total deposits raised by 2.8% QoQ (& 10.0% YoY). The NIM upped 5bps to 1.76% in 2Q12 from 1.87% in 1Q12 on better leverage with L/D ratio rose to 80.2%.

2Q12 non-interest income of RM146.4m was marginally positive with both QoQ and YoY growth rates registered at +3.1% and +16.6%, respectively. As such, the total revenue was encouraging at RM375.9m (+3.9% QoQ).

The key surprise during the quarter was the write-backs of RM2.1m in line with the decline of gross impaired loans to RM842m (from 1Q12’s RM910.7m) and the gross impaired ratio was lowered at 2.55% (from 2.87% in 1Q12). Loan loss coverage was at 68.3%.

Cost was contained at a cost-to-income ratio of 46% during the quarter. The achieved annualised ROE of 11.0% was above our expectation of 9.1%.

Outlook

Having a +22% rally over last three months, its current valuation at 0.8x FY13 P/BV with an estimated ROE of 9.1% still offers a favourable risk-to-reward proposition, in our view. AFFIN’s potentially higher credit risks have already priced in by existing discount in its valuation, and, there is room for its trading multiple to improve with the M&As news.

BNM has granted approval for AFFIN to start negotiation with DRB Hicom in potential acquisition of Bank Muamalat (“BMMB”). We believe this is a good move and probably a natural progression given that the acquisition of BMMB will be the key to the group to become a bigger player in Islamic Banking. Besides, t could be a synergistic acquisition as if the acquisition is successful, this to add BMMB’s 58 branches into its existing branches networks and enable AFFIN to tap into BMMB’s existing business collaboration with DRB-Hicom, in particularly with Pos Malaysia and Proton.

Change to Forecasts       We are maintaining our FY12E PAT of RM528.5m and FY13E of RM554.9m.

Rating   MAINTAIN OUTPERFORM

All in, we believe AFFIN presents a good and under-appreciated investment proposition. We see room for further expansion in its valuation multiples with improving operating metrics in the coming years.

Valuation            Our TP of RM4.30 is on based on a targeted 1.0x its FY13 BV.

Risks      Tighter lending rules and a margin squeeze.

Source: Kenanga