News

• Affin Holdings Bhd (AHB)) plans to undertake a corporate reorganisation exercise that would see its wholly-owned subsidiary Affin Bank Bhd (ABB) taking over its listing status on the Main Market of the local stock exchange.
• Under the corporate exercise, which is undertaken to position AFFIN Bank to spearhead the banking group’s future growth, Affin’s shares will be exchanged with the shares of Affin Bank on a one-to-one basis

Comments

• We are not entirely surprise with the exercise given the need of capital requirement for financial holding company (FHC) to have the similar level capital with banks entities following the extension of the Basel III capital adequacy rules for FHC.
• The exercise will witness AHB to transfer all its subsidiaries and associates namely AffinHwang Investment Bank (100% stake), Affin Money Broker (100% stake), AXA Affin Life Insurance (51.00% stake) and AXA Affin General Insurance (37.07% stake) to ABB.
• We are positive on the new development as the proposed exercise will ensure ABB to 1) streamline and simplify group structure 2) improve cost and corporate efficiency 3) improve its capital level
• Basis for the exercise 1. ABB will issue a new share of 254k to level the number of shares with AHB of 1.9m shares 2. AHB will undertake a distribution-in-specie of 1 ABB share for each existing AHB shares

Risks

• Delay in delivering key KPIs under Affinity program and high cost-to-income ratio.

Forecasts

• We maintain our forecasts.

Rating

HOLD (↔)

• Despite the benefit of reorganization, we are unperturbed as we are keeping our eyes on Affin’s weak asset quality and moderation in the loan-loss-coverage. Despite a boost in earnings mainly from lower credit cost in recent results announcement, higher cost-to-income-ratio would derail its overall performance.

Valuation

• Maintain HOLD recommendation with unchanged target price of RM2.30 based on BV of 4.5x; cost of equity of 9.6x; LT growth of 3% & ROE of 6x

Source: Hong Leong Investment Bank Research - 17 Feb 2017