AMMB Holdings Bhd ('AMMB') said it had on 10 July 2012 entered into a conditional sale and purchase agreement to acquire a 100% equity interest in MBF Cards S/B, including a 33.3% equity stake in Bonuskad Loyalty S/B, for a total cash amount of RM623.4m (implying 2.8x book value).  While the valuation pricing is much higher than our expectation, we believe the acquisition makes strategic sense. Besides, as Credit Card business is a high ROE (i.e. >20%) business segment, such valuation is justifiable. Moreover, we believe its strong balance sheet capability with RM2.2b in excess capital and a 10.5% Core Capital Ratio will enable the group to support this acquisition. As such, we do not foresee MBF Cards acquisition having a negative impact on the group's dividend payout capability.  Management  has been guiding for a dividend payout of 40%-50% in FY13 and we believe this expectation is still valid. The stock offers a net dividend yield of 5%.  We continue to maintain our OUTPERFORM  rating  on  AMMB  with  an unchanged target price of RM6.70 (based on 1.6x its FY13 BV of RM4.16). 

We are positive on the move. The acquisition makes strategic sense as there will be a market share enhancement whereby AMMB will become a dominant player in three areas of the card business, i.e. card issuance, merchant acquisition and bill payment. The enlarged scale of AmBank-MBF Cards will make it the top 3 players in the merchants acquiring business with more than 45,000 merchants in force and an increased cards receivables level of RM2.6b (7.4% market share from 6.0% previously).   We think organic growth will be less time-effective for  AMMB in gaining market share when the card business industry is highly competitive and is overshadowed by the new Responsible Finance guidelines. According to the May 2012 monthly statistic numbers, credit card loans growth was lower at 4.98% (from April 2012's +6.16% YoY). Obviously this is a slower growth as opposed to the recent household loans growth of +11.7% YoY. 

Strategically fit.Hence, we believe that the organic growth of the credit card business could have reached a saturated level. As such, financial institutions (banks and non-banks) are targeting non-organic growth strategies to grow their market shares. The ability to capture market share through this acquisition will enable AMMB to grow its fee income from merchant transactions as well as interest income  from  credit  card  loans.  The  enlarged scale of AmBank-MBF Cards operation presents opportunities for revenue and cost synergies.  There will also be a ready pool of customers for cross-selling opportunities of AMMB's financial products.  

Post-acquisition, AMMB will have the opportunity to tap on MBF Cards' established corporate bill payees and leverage on a combined network with additional products and services.   Besides, we understand that credit card operators need a critical mass in terms of card circulation and merchandiser in order to attract more card applications and to retain existing cardholders. With the bigger number of cards issued, this will definitely enhance its customer loyalty and bargain power to merchandisers

Source: Kenanga