Wednesday, 6 March 2013

AMMB Holdings - The Huge Laggard

AmBank Group’s (“AMBANK”) share price has underperformed in 2012 due to the fears of a dilution in its earnings per share following its pricey Kurnia Insurans and MBF acquisitions. The stock is now trading at the lowest point of its historical PER band as well as its P/BV band over the last five years. Its FY13 P/BV is also now at a 12.5% discount to its historical average of 1.6x. We, however, expect the share price playing a catch-up in 2013. This is because AMBANK has clearly demonstrated a track record of delivering quality and consistence growth in its ROE under ANZ’s leadership. In our view, AMBANK has the ability to generate synergies from the acquisition and is likely to immediately tap on MBF’s merchants as a new business growth strategy. We like the company’s undemanding valuations and its new business growth drivers, i.e. SME loans, payrolls and CASA, which will support the gains in its ROE and, as per management guidance, we are estimating the ROE to register in the range of 14%-15% post it recent acquisitions. We continue to rate AMBANK as an OUTPERFORM with an unchanged TP of RM7.40, implying 1.7x FY14 PBV or 11.7x FY14 PER.

Deserve a rerating? While the stock used to be a favourite among investors, interest has dwindled on it due to the following reasons: 1) uncertainty over its dividend yields going forward, 2) concerns about possible dilutions, 3) its limited potential to deliver earnings surprises versus its other peers, and 4) its premium valuations. However, we believe that AMBANK is poised for a rerating as these concerns should be put to rest by the likely continued growth of the group post its recent acquisitions and from the factors highlighted below.

Basel III developments bode well for dividends and should quell cash call fear. AMBANK is expected to offer one of the highest net dividend yields of 4.0% in FY13 (4.8% in FY14), based on a conservative 40% payout, in our Malaysian banks stock universe (versus the market average of 3.5%). We see potential upside to its dividend yield as well should AMBANK clear the new Financial Bill’s requirements. We believe that there is still plenty of investor appetite for high-yielding stocks and expect AMBANK to rerate given the growth in its dividend yield above.

With less scope for substantial earnings surprises for other banks, the focus could shift to AMBANK. Having already seen some substantial upgrades in the consensus earnings for other banks in the past on credit cost improvements, there is now limited scope for them on this catalyst compared to AMBANK. In fact, AMBANK has achieved a loss charge rate below its 25bps guidance in FY12 and hence, there could be upside to the consensus earnings estimate for FY13 in our view as the market starts to price this factor into its earnings.

Valuation premium has diminished. As AMBANK’s share price has substantially lagged behind its other banking peers, the stock now trades at the lowest PER among the large-cap liquid banks under our coverage. AMBANK’s FY14 PER of 10.0x is also now at a 14% discount to the industry average PER of 11.6x (vs. AMBANK’s FY14 PER is at 10.0x / Maybank’s FY13 12.1x / CIMB’s FY13 11.6x / PBBANK’s FY13 13.4x and HLBANK’s FY13 14.3x) and a 13% discount to its historical average PER of 12.6x.

Capital surplus positioned for BNM’s Basel III. Under the Basel III proposals in 2010, the Core equity Tier 1 (CET 1) requirement has been raised to 7% (from 2%), comprising a 4.5% minimum CET 1 and a conservative buffer of 2.5% (to withstand future stress). Individual regulators in each country can impose between 0% to a 2.5% counter-cyclical buffer if their credit growth is too strong. Note that the timeline for the implementation has been extended to January 2013-January 2019, giving banks more time to comply. From a 2% minimum CET 1, the required levels will rise to 3.5% by January 2013, 4.5% by January 2015 and 7.0% by January 2019.

These developments bode well for AMBANK as it provides a greater certainty over the group’s dividend stream. Based on our estimates, AMBANK’s CET 1 will fall by just 0.1-0.2% to 9.2% due to the Basel III adjustments and its CET 1 will rise to 9.2%, factoring in the retained earnings for 2013-14 (based on a 40-50% payout). Our estimated CET 1 under Basel III is consistent with the management’s estimate. With the Basel III rules, we don’t see the need for the group to further raise equity capital.

Given that its system loan growth is not perceived as excessive (11.3% in Jan 2013 vs. 2012 GDP growth of 5.6% YoY), we do not expect the authorities to impose much counter-cyclical buffers. Moreover, management has not implemented a dividend reinvestment plan, which should enable the group to sustain its current dividend payouts. Based on a conservative 40% cash dividend payout, AMBANK is expected to offer one of the highest net dividend yields of 4.0% in FY13 and 4.8% in our Malaysian banks stock universe (vs. the market average of 3.5%). We believe that there is even an upside risk to its dividend payout on its surplus capital once it clears the newly suggested financial bill’s capital requirement.

Source: AmeSecurities

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