We maintain our BUY call on Malaysia Building Society (MBSB) with a lower fair value (FV) of RM0.95/share from RM1.02/share. Valuation remains inexpensive with the stock trading at 0.7x to our BV/share estimate. Our revised FV is based on a P/BV of 0.8x, supported by an ROE of 7.5% for FY20. We lower our FY19/20/21 earnings estimate by 9.2/%7.5%/2.3% to RM509mil/RM603mil/RM712mil after adjusting our estimates for Islamic banking income and raising our credit cost projection.
The group reported a stronger 3Q19 net profit of RM170mil (+60.1% QoQ; +39.4% YoY). QoQ, the higher earnings were contributed by a rise in operating income coupled with lower opex and provisions due to a more favourable macroeconomic forecast which improved the expected credit losses (ECL) for its retail loan portfolio.
9M19 earnings of RM360mil (-31.3%YoY) were below expectations, accounting for 64.2% of our estimate and 68.3% of consensus projection. The deviation from our expected numbers was mainly attributable to slower-thananticipated write-back in provisions.
The group’s total income was subdued with a marginal decline of 0.3% YoY in 9M19. Higher non-interest income (NOII) and Islamic banking income were offset by lower net interest income due to the conversion of conventional to Islamic assets. This leaves a balance of RM1.9bil of conventional loans which have yet to be converted.
Credit cost in 3Q19 continued to show improvement, declining to 0.9% vs. 1.0% in 2Q19. The group’s credit cost for 9M19 was 1.2% compared to 0.2% in 9M18. The latter was aided by a higher write-back in provisions. Management is now guiding for the group’s total provisions to decline to circa RM250mil for the full FY19 from RM326mil in 9M19 through enhancements to its modelling for retail loans which are expected to be carried out in 4Q19. Based on our estimate, this should translate into a credit cost of 70bps for FY19. We understand that there will be a change in the present single-factor model based solely on consumer price index (CPI) to a model based on multiple variables. The is likely to result in writeback in provisions for retail loans as well as reduce the fluctuations in the group’s allowances for impairments based on ECL going forward. Also, the group is pushing for recoveries from corporate loans to further improve its provisions.
This book is the result of the author's many years of experience and observation throughout his 26 years in the stockbroking industry. It was written for general public to learn to invest based on facts and not on fantasies or hearsay....