We are turning bullish on Affin considering strong likelihood of value unlocking for AHAM in the near-term, potential divestiture of its insurance units, followed by possibility of special dividends (we are looking at a generous yield of 27%). Besides, Covid-19 vaccination rollout and the healing economy will drive better financial showing at its banking operations (already seeing signs of bottoming out). Moreover, current price point is attractive (P/B at -1.0SD) and it is a laggard in the banking sector. Although we were critical of its asset quality and low ROE previously, the risk-reward profile seems more favourable now. Overall, FY21-22 profit forecasts are unchanged and we introduced FY23 estimates. Upgrade to BUY recommendation with a higher GGM-TP of RM2.25 (from RM1.85), based on 0.43x FY22 P/B; this TP was matched to our SOP valuation as well.

Affin is one of the poor performing banks under our coverage as share price has fallen 5% YTD. Hence, we reassess our investment thesis and its risk-reward profile.

AHAM going for IPO sooner than later? As per Bloomberg news in Dec-20, we see high chance that Affin Hwang Asset Management (AHAM, 63%-owned subsidiary) will go for listing in the next 1-2 years. We believe the time is ripe for this value unlocking move to transpire given: (i) its asset under management (AUM) has grown strongly vs pre-Covid-19 levels (FY20: +26% YoY), (ii) key personnel have exercised their share options early in Mar-19 (way ahead of the expiration in Jun-24), (iii) capital markets are vibrant, and (iv) there is ample liquidity in the market. In our opinion, AHAM could fetch RM1.4bn market capitalization against an AUM of RM76bn; this is based on a valuation of 1.8% Price/AUM (in line with the acquisition multiple paid for AHAM back in 2014), translating to a trailing FY20 P/E of 12.0x and P/B of 4.5x. Our calculation suggests every 10% stake dilution may potentially shave c.RM10m from group’s profit (<2% impact on a normalized level) with ROE falling <10bp.

Exiting insurance businesses? Back in Sep-19, Bloomberg reported that Affin and AXA are looking at options for their general (AAGI, 50%-owned) and life insurance (AALI, 51%-owned) businesses in Malaysia, including disposal, which said to be able to fetch c.RM2.7bn (at US$650m); Affin’s stake translates to RM1.4bn. We like the idea of divestiture as it would then allow Affin to be more focus on growing its core banking businesses. Also, calculation shows there could be a potential uplift in CET1 capital ratio of 2.9ppt to 17.4%. Besides, we are not overly worried with the possibility of losing its insurance-related earnings given AAGI’s ROE has been sliding down for the past couple of years while AALI is not profitable. Without both of them, the group is likely to forgo c.RM30-40m of insurance earnings p.a. (<10% impact on normalized bottom-line) with ROE dropping 60-80bp.

Dividend bonanza? If the events discussed above come to fruition, we would not be surprised if special dividends do follow afterwards. In our opinion, there is no need for Affin to hoard the excess cash as its balance sheet is already the least levered among banks under our coverage (7.2x vs sector: 9.6x). Also, this move can help to preserve ROE from declining due to loss of income. Besides, we believe major shareholders like LTAT & Boustead are incentivized to encourage Affin to divvy out any significant divestiture proceeds. Assuming 10% of AHAM shares are offer for sale (@ 1.8% Price /AUM) with both AAGI and AALI fully disposed (@ 1.0x P/B instead of 1.6x and 1.9x price-tag as reported by Bloomberg), we estimate Affin stands to generate c.RM940m of cash or RM0.47/share (AHAM: RM140m; AAGI and AALI: RM800m). If the entire portion can be declared as special dividends, we are looking at a yield of 27%.

Better days for banking unit. As for its banking operations, we still think Covid-19 vaccination rollout and healing economy will drive better financial showing. Aside from making losses in 4Q20 (due to higher impaired loan provision), we are already seeing signs of bottoming out. On a sequential QoQ basis, (i) loans grew 0.7%, (ii) deposits rose 0.8%, while (iii) NIM expanded 17bp. That said, GIL ratio has creeped upwards (+66bp) but we are not overly concerned as Affin has made substantial pre-emptive provisioning in FY20 and we reckon credit risk has been adequately priced in by the market, looking at the high FY21 NCC assumption applied by both us and consensus (above the normalized run-rate but below FY20’s level). Moreover, we also believe the Government and BNM will remain supportive in helping troubled borrowers, limiting a more significant deterioration in GIL ratio. We gathered 15% of Affin’s total loans are under repayment assistance and if 30% here were to default, a loss of RM577m may be incurred (employing a 28% LGD, based on 4Q20’s figures) vs RM871m provisions baked into our financial model for FY20-21 (implying a conservative cover of 150%).

Forecast. FY21-22 earnings forecasts unchanged. Introduced FY23 estimates.

Raise to BUY (from Hold) with a higher GGM-TP of RM2.25 (from RM1.85), as we roll valuations to FY22 and matched it to our SOP analysis. The TP is based on 0.43x P/B (from 0.37x) with assumptions of 4.8% ROE (from 4.2%), 7.2% COE (from 6.2%), and 3.0% LTG. This is in line its 5-year average of 0.46x but below the sector’s 0.92x; the discount is fair given its weak ROE output, which is 4ppt beneath industry mean. Although we were critical of its asset quality and low ROE previously, the risk-reward profile seems more favourable, after further scrutinizing its break-up value. We believe there is a strong likelihood of value unlocking for AHAM in the short-term, potential divestiture of its insurance units, followed by possibility of special dividends. Besides, healing economy bodes well for Affin and current price point is attractive (0.35x P/B at -1.0SD). Plus, it is a laggard in the banking sector. All these have made us turn bullish on the stock.

Source: Hong Leong Investment Bank Research - 7 Apr 2021