Journey to Wealth
Affin Holdings - OUTPERFORM - Attractive risk-reward profile
We believe AFFIN's potentiallyhigher credit risks are somewhat priced in by the discount in its valuation,which is already based on more conservative earnings and credit cost assumptions.With a reasonable 9% ROE and its undemanding valuations (FY13E: 10.2x PER, 0.7xP/BV), there is room for its earnings to improve. We are initiating coverage ofAFFIN with an OUTPERFORM rating and a target price of RM4.30.
Higher credit cost in the price. AFFIN's 32% PER discount to its banking peers, we think, could imply a creditcost that is 59 bps higher than its peers. In other words, a substantiallyhigher 91 bps credit cost is already priced in for AFFIN versus the 32 bps forits peers' average. We estimate this level of credit cost for AFFIN is sufficientto cover a net impairment formation of 26% of its loans each year.
Reasonable ROE and Tier 1. AFFIN's FY12E ROE of 9% is reasonabledue to its conservative growth strategy over the past few years (loan growthaverage of 10% p.a. FY08-12). AFFIN isalso reasonable capitalised with a T1 of 10.7% as at end-December 2011.
Higher beta play? AFFIN hasa sector low NPL ratio of 2.31% (4QFY11) with sufficient provision coverage of78% (4QFY11). However, AFFIN hasrelatively higher exposure to corporate loans (2011: 56% of loans). We thinkthis makes AFFIN a higher beta play and more geared to the economic cycle.
A conservative estimates. Weexpect conservatively a 4%-5% earnings growth in FY12-13, driven by loan growthof 10%, a falling cost-to-income ratio to 46% (from 48% in FY11), a lowercredit cost ratio assumption at 23bps and stable NIMs. The fallingcost-to-income ratio and lower credit cost going forward remain the catalystfor potential earnings surprises later.
Valuation. We initiatecoverage on AFFIN Bank with an OUTPERFORM rating. In our view, AFFIN presents agood and under-appreciated investment proposition. We see rooms for its furthervaluation multiple expansion on the Responsible Finance theme in the comingyears. Our TP of RM4.30 is based on a targeted 1.0x of its FY2013 P/BV.
Source: Kenanga
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