Affin looks to dispose its asset management arm to CVC Capital for RM1.4bn; a price-tag which we deem to be attractive. However, there is an earnings gap that needs to be filled and ROE will be negatively affected. Nonetheless, we prefer to view the glass half full; the monetization of AHAM would have in effect frontload 10 years’ worth of its profit, which is not a bad thing. Besides, Affin will be left with slews of business levers to explore and potentially, shareholders could be rewarded with special dividends. Moreover, we find the market is undervaluing its commercial banking unit at 0.27x P/B. Maintain BUY and GGM-TP of RM2.25, based on 0.45x FY22 P/B.

NEWSBREAK

Affin looks to dispose its 63%-owned asset management arm (AHAM) to CVC Capital Partners at a price-tag of RM1.4bn. The deal is expected to complete in 3Q22.

HLIB’s VIEW

AHAM being unlocked at a good price. We are pleased with AHAM’s high disposal value, which works out to be 2.8% Price-to-AUM (P/AUM), a premium compared to its 2014 acquisition P/AUM of 1.8% and industry mean M&A valuation of 2.2%. Whereas from a P/B perspective, it was priced at 19.1x, being significantly higher than current implied market valuation of 0.40x. In turn, Affin is poised to pocket a divestment gain of RM1.0bn and see its CET1 ratio bumped up by 2.9ppt to above 16%.

ROE impact. AHAM’s contribution to group PBT is 20-30% and losing this portion of business may shave FY23 ROE by 100-150bp. We understand Affin’s main intention is to plough back the sale proceeds to drive its core banking business. However, we think this is a slow way to plug the gap left by AHAM. Moreover, ROE would also be hit by the enlarged equity base, resulting from the RM1.0bn disposal gain (estimated to be c.40bp). Nevertheless, Affin did not rule out the potential for special dividends, which in turn can help to ease ROE pressure (we calculated every RM100m payout or 2.6% dividend yield, may lift ROE by 4bp). Separately, Affin is redeeming its RM1bn medium-term notes (MTNs) that has high coupon rate of 5.45%, translating to a cost saving of RM55m (works out to be 10% of PBT); this move enhances ROE by c.35bp. Taking into consideration the loss of income from AHAM, cost saving from the RM1bn MTNs redemption, and enlarged equity base, we estimated the overall net negative impact to our FY23 profit forecast is 13-24% while ROE may fall by 105-155bp.

Forecast. Unchanged, pending completion of the deal.

Keep BUY and GGM-TP of RM2.25, based on 0.45x FY22 P/B with the assumptions of 4.8% ROE, 6.9% COE, and 3.0% LTG. This is in line to its 5-year average of 0.45x but below the sector’s 0.90x; the discount is fair given its weak ROE generation, which is 4ppt beneath industry mean. In our opinion, Affin’s risk-reward profile is still skewed favourably to the upside as the disposal of AHAM and the potential special dividends are re-rating catalysts. Essentially, monetizing AHAM at a price-tag of RM1.4bn would have in effect, frontload 10 years’ worth of its earnings, which is not a bad thing. Also, Affin is left with a slew of business levers to explore despite the short-term ROE drag. Besides, from our reverse SOP assessment, we calculated the market is only valuing its commercial banking unit at 0.27x P/B with c.3% ROE output (normalized ROE: 4%) vs peers 0.90x P/B with 9-10% ROE, implying there is upside from current levels.

Source: Hong Leong Investment Bank Research - 3 Feb 2022