Following our meeting with management last Friday, our earlier
concerns on possible changes in the management team have been cleared. The
group’s business operation should remain as usual and management reiterates
that its business strategy remains clear and that there are no unusual changes
in the leadership of the group as all the succession plans are actually in
place. Firstly, management has submitted an experienced name to Bank Negara Malaysia
as a replacement for the retiring Islamic Banking CEO, Tuan Haji Yahya. Secondly, the group is in a process of identifying
a capable candidate, to succeed Eric Lee, who has recently resigned. Management
reassured that the group’s business strategy under the leadership of the existing
CEO, Mr Sng Seow Wah, remains clear in focusing on growing the selected market
segments such as mortgages, hire-purchases as well as SME loans. We are comforted by management’s clarifications
and its commitment to further grow the bank against rising competition in the
sector. We are maintaining our MARKET PERFORM rating on AFG with the same
target price ofRM4.00, based on 1.4x its FY14 book value of RM2.89.
No actual revamp in
the management team. Management does not expect the resignation of CFO Eric
Lee and the retirement of Tuan Haji Yahya to result in any major changes in
AFG's operating and business strategy. Firstly, we understand that Mr. Sng Seow
Wah will continue to lead the bank and remain on the Board. Secondly, the group
is in the process of identifying a replacement for Eric Lee, and thirdly, Tn
Haji Yahya’s replacement has already been identified and is now waiting for
BNM’s approval. Besides, the management also clarified that the recent
departure of a few division heads were due to retirement and expiry of
employment contracts. As such, the group appears to have its management intact
and there are no major changes expected in the overall leadership and all top
management positions are filled currently. Hence, as against our earlier
concerns, management informed that the staff morale is actually high and is
fully committed to support the bank’s operational and corporate
strategies. The group has gained market
share in March-2012 and now make up 2.44% of the industry with a total gross
loan of RM24,984m (11.3% YoY).
Eyeing low-risk
mortgages and SMEs as the drivers.
The momentum of its loan growth is sustainable driven by its aims of
growing SME loans by 18%, mortgages loans by high teens as well as starting up
its hire-purchases lending. Our loan
growth forecast of 11% YoY for AFG is thus highly achievable with risk actually
on the upside. The immediate challenge for the bank is renewed competition
especially on the household products. Rising funding costs together with price
cutting in its loans should have a negative impact on its NIM over the next
12-24 months. However, its strong CASA contribution to total deposits should
offer some cushioning impacts.
Valuations. We
have imputed in optimistic earnings expectations (EPS growth of 16.6% for FY12
and 8.2% for FY13) given management’s progrowth 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 are maintaining our MARKET PERFORM rating on
AFG and target price at RM4.00 based on 1.4x its FY14 book value of RM2.89 as
we roll forward our valuation year.
The risk to our call
is that the stock could potentially trade up to 1.8x-2.0x PBV (or
RM4.60-RM5.10), which would be in line with the +2SD P/BV level of 1.9x (or
RM4.90) should we input in a 20%-30% controlling premium to our targeted P/BV
valuation.
Source: Kenanga
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