Affin Holdings Berhad - 9M12 above expectations

Period    3Q12/9M12

Actual vs. Expectations     The 9M12 PAT of RM468.6m was marginally above the consensus forecast (85%) and that of ours (89%).

Dividends   The group announced an interim franked dividend of 11.0 sen per share less 25% income tax and a tax exempted dividend of 4.0 sen per share.

Key Result Highlights    The group announced an interim franked dividend of 11.0 sen per share less 25% income tax and a tax exempted dividend of 4.0 sen per share.

The key surprise during the quarter was that the 3Q12 non-interest income of RM167.5m was significantly positive, rising 14.4% and 39.8% QoQ and YoY respectively. As such, the total revenue came in encouragingly at RM395.7m (+5.3% QoQ).

The 3Q12 net interest income was flat with a marginal decline of 0.6% QoQ +7.8% YoY) supported by a positive growth in gross loans by 1.8% QoQ (15.5% YoY). Meanwhile, the total deposits rose by 1.2% QoQ (7.5% YoY). The estimated NIM was higher by 1bps to 1.77% in 3Q12 from 1.76% in 2Q12 on a reasonable leverage with the L/D ratio at 79.7%.

The write-back of RM23.4m in line with the decline of the gross impaired loans to RM818.7m (from 2Q12’s RM842.2m) with the gross impaired ratio falling to 2.43% (from 2.55% in 2Q12). Loan loss coverage was at 70.7%.

Cost was lower at a cost-to-income ratio of 43% during the quarter (vs. 46.1% in 2Q12 and 49.0% in 3Q11) due to the increase in revenues.

The achieved annualised ROE of 11.0% was above our previous expectation of 9.1%.

Outlook     AFFIN’s potentially higher credit risks have already been priced in by the existing discount in its valuation and hence, there is room for its trading multiple to improve with its M&A news.

The negotiation with DRB Hicom for a potential acquisition stake in Bank Muamalat (“BMMB”) is still ongoing. This is a good move given that the acquisition of BMMB will be the key to the group becoming a bigger player in Islamic Banking and will widen AFFIN’s branch network with an additional 58 branches from BMMB should an acquisition go through. In addition, AFFIN will also be able to tap into BMMB’s existing business collaboration with DRB-Hicom, in particularly with Pos Malaysia and Proton.

Change to Forecasts     We have raised our FY12E and FY13E PAT estimates by 13% and 14% to RM598.5m and RMRM633.1m respectively to factor in the higher than expected non-interest incomes contribution.

Rating     MAINTAIN AT OUTPERFORM

With the strong result performance, its current valuation at 0.8x FY13 P/BV with an estimated ROE of 10.3% is undemanding in our view and offers a favourable risk-to-reward proposition.

Valuation   We have raised our TP to RM4.40 (from RM4.20 previously) based on an targeted 1.0x FY13 BV.

Risks     Tighter lending rules and a margin squeeze.

Source: Kenanga