Media news has reported that a few top-ranking officials are
leaving the banking group. In addition to that, we understand that its
long-serving Islamic Banking CEO has also just resigned recently. We are
concerned that this continuous change in the management team could affect the
business operation of the group and its staff morale, especially in executing
the bank’s operational and corporate strategies. We are maintaining our MARKET
PERFORM rating on AFG, for now, with a slight change in our target price to
RM4.00 (from RM3.70 previously) as we have rolled forward our valuation base
year to FY14 and its estimated book value of RM2.67.
Changes in the
management team. Recently, media news has reported that Alliance Bank
Malaysia’s (AFG) chief financial officer, Eric Lee, has resigned from his
post. It was reported that Lee’s
departure came after another high-ranking official also left the bank, i.e. the
head of wholesale banking, Choo Joon Keong.
In addition to that, we also understand that the group’s long serving
Islamic Banking CEO, Tuan Haji Yahya bin Ibrahim, has also resigned recently.
These mean up to 15 top officials have left the group since 2010. Despite the
bank responding to these reports and saying that there was actually no
restructuring or reorganisation exercise taking place at the bank, we are
concerned that the continuous changes in the management team could affect the
business operation of the group and its staff morale, especially in executing
the bank’s operational and corporate strategies.
History replay?
Recall during the transition years, 2009-2011, the group lost its market share
since the change in its management team above with its total gross loan making
up only 2.15% of the industry’s loans in 2011 compared to 2.48% in 2009 with
total gross loan in 2011 of RM21.6b.
We are maintaining
our conservative view on the group. We believe that there will continue to
be a few more changes in its management team given the current vacant few top
management positions. We see higher operating risks over the next six months
and its strategy execution could lag behind its peers in the process. We
believe investors should impose a higher risk premium on the stock. Besides, the immediate challenge for the bank
is to refocus on the growth of its assets as competition is only likely to increase. Rising funding costs together with price
cutting in its loans should have a negative impact on its NIMs over the next
12-24 months.
Valuations. We
have been tracking
AFG’s P/BV band
closely to monitor
its share price behaviour. We conclude that AFG’s share price trades
close to both the economy and equity market
cycles since 2007. However, AFG is now trading at +1SD above its
historical mean. We think that the share price could have already factored in
this M&A transaction as it is currently trading at 1.7x forward P/BV, which
is within its historical M&A valuation of 1.5-1.7x BV. Hence,
we believe that
the share price could have
factored in the DBS Bank acquisition premium already. Moreover, even if we impute in optimistic earnings
expectations (EPS growth of 24.4% for FY12 and 16.6% for FY13), AFG’s current
headline ROE of 14.6% appears justified to just command a 1.5x P/BV valuation
(our targeted multiple). As such, the stock valuation hence appears less
attractive at the current share price and it may also be difficult to justify
higher fundamental valuations for the stock from its current level. On the flip
side, this may not have factored in the operation risk into its current
valuation. We are maintaining our MARKET PERFORM rating on AFG with a slight
changes in our target price to RM4.00 based on 1.5x FY14 book value of RM2.67
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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