Tuesday, 12 March 2013

Alliance Financial Group - Divesting non-core asset

News    Alliance Financial Group Berhad (“AFG”) has entered into a conditional Share Sale Agreement with American International Assurance Berhad for the disposal of its 30% equity interest in AIA AFG Takaful Berhad for atotal cash consideration of RM45m. Note that AIA AFG Takaful Berhad was only recently incorporated on 6 December 2010 with an issued and paid-up share capital of RM100m to carry out family takaful business.

Comments  While the amount of disposal proceed is relatively small vis-à-vis its core capital of RM4.1b as at end-December 2012, this development is mildly positive for AFG, creating some space for its core capital ratio required under the new Basel III regime. Other than that, the divestment is not expected to have a material effect on the group earnings. There are no changes in our earnings estimates as the JV was just breaking even previously.

Outlook  To recap, the momentum of its loan growth is seen as sustainable, driven by the bank’s aim of growing its SME and mortgage loans (targeting high-teen rates). Our loan growth forecast of 11% YoY for AFG is thus highly achievable with the risk actually being on the upside.

 However, the immediate challenge is that continuous competitions could have a negative impact on its NIM. In fact, management has guided for a potential NIM compression of 10bps as the group’s strategy to focus on mortgage and SME loans will see it competing more in these two highly competitive segments, which could lower its asset yields and raise its funding cost.

 In addition, AFG’s earnings are likely to be unexciting and we expect another major leg up in its fee income to likely happen only in FY14/15 and hence, its cost-toincome ratio may not decline as fast as earlier expected. We expect its earnings growth to be only at a mid-tohigh single digit range over the next two years.

Forecast  There are no changes in our earnings estimates.

 Given our unexciting earnings expectations (EPS growth of 8.2% for FY13 and 5.3% for FY14), AFG’s current headline ROE of 12.9% appears justified to command only a fair 1.4x P/BV valuation (which is also our targeted multiple).

Valuation  Maintaining our MARKET PERFORM rating, and our TP of RM4.00 based on 1.4x FY14E book value of RM2.89.

Risks  There could be more upside rather than downside risk as the stock could potentially trade up to 1.8x-2.0x PBV (or RM4.80-RM5.30), which would be at a +2SD level above its mean PBV, in view of its potential M&A activities.

Source: Kenanga

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