AFG acquisition may be delayed?

MARKET PERFORM 

Target Price: RM4.00

News 

• According to media news, Temasek Holdings’ plans to rationalise its financial interests in Malaysia has hit a snag, drawing attention to the difficulties faced by financial groups to expand regionally. Temasek is the Singapore government state-owned investment arm. 
• The lack of reciprocity was said to be among the reasons why Singapore-based DBS Bank Ltd’s plans to acquire a 14.2% stake in AFG was taking longer than expected, the report said. The deal was first announced by AFG in April when DBS received approval from BNM to start negotiations. However, there have not been any updates since then. The reason for the delay was unclear but source quoted said the shareholding structure of AFG complicated the deal. 
• Adding to that, the report said that BNM wants Singapore to give at least one Malaysian bank a qualifying full banking license in return for approving the deal. At present, only Malayan Banking group has the QFB license to operating in Singapore. CIMB Group has applied for the QFB license but has yet to obtain approval. 

Comments 

• If the media report above is true, we think that DBS’ move to acquire a stake in AFG will now take longer than expected to be finalised as it will then involve a government-to-government negotiation. 
• We believe the shareholding structure issue in AFG could be resolved by taking away the holding company structure of Vertical Theme, which will then likely see Langkah Bahagia and Temasek having a direct stake in AFG. 

Outlook 

• The momentum of AFG loan growth is driven by its aim of growing SME loans (+18%), and mortgage loans (high teens). Our loan growth forecast of 11% YoY for AFG is thus highly achievable with the risk actually on the upside. 
• However, the immediate challenge is that the continuous competition could have a negative impact on its NIM. In fact, the management has guided for a potential NIM compression of 10bps as the group’s strategy is to drive growth in its mortgage and SME loans, which are highly competitive. 
• AFG is, however, well-positioned for a slowdown environment, where its credit cost is likely to outperform its peers considering its lower levels of new NPL formation and aggressive provisioning in the past. 

Forecast 

There are no changes in our earnings estimates. 

Rating

MAINTAIN MARKET PERFORM 

DBS has clearly stated that it has no intention to increase its existing stake in AFG. Given our optimistic earnings expectations, (EPS growth of 16.6% for FY12 and 8.2% for FY13), which is in line with management’s pro-growth strategies, AFG’s current headline ROE of 12.9% appears justified to command a 1.4x P/BV valuation (our targeted multiple). As such, we believe that the share price has already factored in the earnings growth trend. 

Valuation 

Our TP also unchanged at RM4.00, based on 1.4x the FY14E book value of RM2.89. 

Risks 

We see more upside risk than downside with the stock potentially trading up to 1.8x-2.0x PBV (or RM4.80-RM5.30), which would be at the +2SD P/BV level of 1.9x (or RM5.10), in an M&A driven event.

Source: KenagaResearch