Based on some foreign media reports which highlighted the latest development of Hyflux Ltd (Maybank’s exposure RM1.95bn as at June 2018), we understand that the former is planning to restart talks with creditors and to explore outcomes other than liquidation. We view this as a positive development for the Maybank group, but cognizant that the deadline for Hyflux’s debt moratorium (granted by the Singapore High Court) period will end by 30 April19. If all parties fail to strike a deal, there could be some negative repercussions on Maybank’s 2019E earnings, i.e. higher credit cost vs. its guidance of 40bps for 2019 (Affin’s 2019E: 47bps). We downgrade Maybank from Buy to HOLD and cut our PT to RM9.00 on a lower valuation target multiple of 1.3x 2019E P/BV from 1.66x.

Bailout Deal at Hyflux Ltd Terminated by Management

Based on a recent news report, the bailout deal between Singapore’s Hyflux Ltd. and an Indonesian consortium led by the Salim Group has fallen through (announced on 4th and 5th Apr 2019) and meanwhile, Hyflux has until 30th of April before its debt moratorium expires. We understand that Hyflux is exploring various possible outcomes.

Maybank Is a Major Financier of Hyflux’sTuaspring and TuasOne

To recap, Maybank has a total exposure of RM1.95bn (SGD658.6m) to Hyflux since September 2013, which covers project financing for: i) Tuaspring’s Integrated Water and Power Plant (IWPP) (SGD602.4m) and ii) TuasOne Waste-to-Energy Plant (SGD56.2m, to be ready by May 2019). As at 2Q18, Maybank had set aside collective provisions totaling RM315.1m. Nonetheless, we keep our earnings forecasts unchanged pending more developments and clarity from the situation. Based on a worst-case-scenario, the Public Utilities Board of Singapore will take over the loss-making Tuaspring Desalination Plant without any compensation for Tuaspring.

Downgrade to HOLD. PT Revised Lower to RM9.00 From RM11.50

We Downgrade Our Rating on Maybank From BUY to HOLD, and Cut Our Price Target from RM11.50 (at a 1.66x P/BV target) to RM9.00 (based on a lower 1.3x P/BV target on 2019E BVPS) in-line with its past five years’ P/BV average multiple of 1.33x, in light a less optimistic market outlook. Its downside risks are mitigated by its strong and amply capitalized balance sheet (CET 1: 15.03%) and sufficient liquidity (Dec2018 LCR: 32.4%).

Source: Affin Hwang Research - 16 Apr 2019