Malaysia Building Society - Expect better net earnings in 3Q Hold

- We maintain HOLD on Malaysia Building Society Bhd (MBSB), with an unchanged fully-diluted fair value  of RM2.60/share. Our fair value is for ex-warrants. This is based on an estimated adjusted (for rights and warrants) FY12F ROE of 22.5%, leading to a fair P/BV of 2.3x.

- We understand that the gross gain of RM55mil (net of RM41mil, after tax) from sale of freehold commercial land Johor is likely to be booked in FY13F. Thus, we have now changed our forecasts to exclude the net gain from FY12F and to include it in FY13F. 

- Our core net earnings for FY13F (without the gain) remain unchanged at RM480mil, but with the gain, our net earnings is now RM520mil FY13F.  For FY12F, we expect the company to remain on track to meet our core net earnings forecasts of RM398mil. 

- We expect loans growth to slow in 3QFY12, following the robust annualised rate of 77.3% in 2QFY12. We believe the company is already close to achieving its gross new loans target of RM10bil for FY12F. Recall that for FY11, the company had also exceeded its internal targeted gross news loans of RM6.5bil, by achieving RM6.6bil.

- Nevertheless, we expect net earnings to increase on a QoQ basis in 3QFY12, with loan loss provision for the collective assessment portion (similar to general provision applied to new loans) likely to be reduced given a slower new loans. To recap, loan loss provision increased to RM84.5mil in 2QFY12 from RM61.1mil in 1QFY12, mainly due to collective assessment provision related to a higher loan base. Its recent 2Q net earnings rose 17.9% QoQ to RM93.7mil in 2QFY12, from 1QFY12’s RM79.4mil. 

- Asset quality is expected to be stable. The overall gross impaired loans for its new business (excluding legacy loans before 2009) are likely to be sustained at 2QFY12’s gross impaired loans ratio of 2.1%, which is much lower than overall gross impaired loans of 13.4%. 

- Given the strong loans growth, MBSB disclosed that its Tier 1 ratio is at 6.6% in 2QFY12, compared to the earlier levels of 7% to 8% in 1QFY12. Total CAR is estimated at 10.5% in 2QFY12, which is also lower than 1QFY12’s 12% to 13%. If MBSB is to maintain Tier 1 ratio at 8%, the required capital may be RM267mil. If Tier 1 ratio is maintained at 9%, the required capital is RM458mil.  

- We expect share price to hold up well given continuing strong topline growth, improvement in asset quality and affirmation of a minimum dividend payout of 30%.   

Source: AmeSecurities