The briefing last Friday was to allay concerns of the potential goodwill write -off and proposed placement exercise. Overall, we take AMMB’s explanation on face value and believe management have acted in good faith and the best interest of shareholders. As a result, FY22-23 EPS forecast is lowered by 9% but ROE was bumped up by 56/34bp, respectively (assuming quantum of goodwill write-off is 2x of new equity capital raised). We are not turning bearish as there should not be any more significant negative events that are capable of pushing down share price. Also, AMMB’s books are cleaner and thus, fitter for a potential M&A in the future. Besides, valuations are already depressed but ROE is improving and the general economy is recovering. However, it has to contend with some less than favourable perception after the unexpected global settlement & surprise capital raising. Retain HOLD but with a lower GGM-TP of RM2.90 (from RM2.95), based on 0.56x FY22 P/B.

Last Friday, management hosted a briefing to address concerns of the potential good will impairment and proposed private placement exercise.

Goodwill impairment. No exact figure disclosed but AMMB shared they are looking at a substantial amount i.e. about twice the value of its proposed private placement at c.RM1.6bn; this makes up almost the entire RM1.9bn goodwill of both its conventional and investment banking businesses. Management reckons it is an opportune time to kitchen sink and clean its books in the upcoming 4QFY21 financial results, alongside the RM2.83bn global settlement with the Ministry of Finance. The ultimate goal here is to help lift ROE by getting rid of unproductive intangible assets. Like before, we view this move positively and welcome it sooner rather than later.

Private placement. AMMB explained further on why they decided to raise additional equity capital despite earlier indications there is no immediate need to do so:

(i) Cost of Tier 2 debt has increased by c.30bp after RAM Ratings downgraded them to AA3 from AA2. Thus, they are now trying to restore capital to a level supportive of an upgrade, to avoid additional debt charges of estimated c.RM4m/year when maturities hit over the next 12-24 months (if newer Tier 2 capital are being raised, they might have to incur an extra c.RM8m/year). Recall, back in late 2018, RAM upgraded AMMB to AA2 from AA3 when group’s CET1 ratio was at 11.9%. With the new funds raised from the private placement and temporary freeze in FY21 dividends, its CET1 ratio should rise to 11.7% (+70bp) but with the current Covid- 19 situation, perhaps a higher threshold of 12.5-13.0% is required.

(ii) Better price negotiation for the potential divestiture of its insurance units. Given its bruised balance sheet (due to global settlement and goodwill impairment), suitors may attempt to lowball and short change AMMB. As such, they wanted to beef up capital to prevent this from happening. We estimated the disposal of AmGeneral & AmMetLife at 1.0x P/B (instead of 1.9x & 3.0x the avg. M&A price-tag involving local general & life insurers) could possibly enhance CET1 ratio by an extra 60bp and 40bp respectively. That said, no timeline was given but AMMB shared it is on track and discussions are ongoing.

(iii) Comfort regulators by accelerating core equity build and create additional capital buffers in an uncertain climate. In turn, this may help to expedite the restoration of dividends if CET1 ratio is on a stronger footing. Nevertheless, back in 2016 when AMMB was still in operation at c.11% CET1 ratio, management was not restricted from dishing out dividends. 

While guidance on its equity financing could be better, we accept AMMB’s explanation on face value and believe management have acted in good faith and in the best interest of shareholders. Also, they have opted ahead with the private placement route instead of rights issue, as fresh funds can be raised expeditiously since it is already under the shareholders’ general mandate.

Financial impact. As highlighted in our earlier report, the proposed private placement would potentially lead to EPS dilution of 9% in FY22-23, assuming no interest income is generated. Also, ROE will typically fall from the enlarged equity base (decreasing by 16-31bp from our initial estimates). That said, the quantum of goodwill write-off being potentially 2x larger than the amount of new equity capital raised, will instead help lift FY22/23 ROE by 56/34bp. Overall, the re-engineered balance sheet has merits and is not a bad idea, considering AMMB will likely end up with stronger ROE that can fetch better P/B valuations. Moreover, the possibility of new strategic shareholders coming onboard could bring fresh perspective and invaluable experience that may drive ROE even higher (management has, however, downplayed this angle during the briefing).

Forecast. We widened our FY21 net loss estimate to RM3.3bbn from RM1.7bn, after factoring a potential RM1.6bn goodwill write-off into our financial model while FY22-23 profit forecasts remain unchanged. Subsequently, we built in RM810m of new equity capital from the proposed private placement (assumed issuance of 300m new shares at RM2.70/share). As a result, FY22-23 EPS is cut by 9%. Net-net, however, FY22/23 ROE was bumped up by 56/34bp, respectively.

Maintain HOLD but with a lower GGM-TP of RM2.90 (from RM2.95), following the adjustments made to our financial estimates. The TP is derived based on 0.56x FY22 P/B (from 0.50x) with assumptions of 7.7% ROE (from 7.1%), 11.3% COE, and 3.0% LTG. This is at -1.5SD of its 5-year average P/B and beneath the sector’s 0.92x. The discount is fair given its softer ROE output vs sector mean (lower by 1ppt). We are not turning bearish as there should not be any more negative events that are capable of pushing down share price. Besides, AMMB’s books are cleaner than before and thus, fitter for a potential M&A in the future. Moreover, valuations are already depressed but ROE is improving and the general economy is recovering. However, it has to contend with some less than favourable perception after the unexpected global settlement and surprise capital raising.

Source: Hong Leong Investment Bank Research - 5 Apr 2021