Media news has reported that a few top-ranking officials are leaving the banking group. In addition to that, we understand that its long-serving Islamic Banking CEO has also just resigned recently. We are concerned that this continuous change in the management team could affect the business operation of the group and its staff morale, especially in executing the bank's operational and corporate strategies. We are maintaining our MARKET PERFORM rating on AFG, for now, with a slight change in our target price to RM4.00 (from RM3.70 previously) as we have rolled forward our valuation base year to FY14 and its estimated book value of RM2.67.  

Changes in the management team. Recently, media news has reported that Alliance Bank Malaysia's (AFG) chief financial officer, Eric Lee, has resigned from his post.  It was reported that Lee's departure came after another high-ranking official also left the bank, i.e. the head of wholesale banking, Choo Joon Keong.  In addition to that, we also understand that the group's long serving Islamic Banking CEO, Tuan Haji Yahya bin Ibrahim, has also resigned recently. These mean up to 15 top officials have left the group since 2010. Despite the bank responding to these reports and saying that there was actually no restructuring or reorganisation exercise taking place at the bank, we are concerned that the continuous changes in the management team could affect the business operation of the group and its staff morale, especially in executing the bank's operational and corporate strategies. 

History replay?Recall during the transition years, 2009-2011, the group lost its market share since the change in its management team above with its total gross loan making up only 2.15% of the industry's loans in 2011 compared to 2.48% in 2009 with total gross loan in 2011 of RM21.6b.  

We are maintaining our conservative view on the group. We believe that there will continue to be a few more changes in its management team given the current vacant few top management positions. We see higher operating risks over the next six months and its strategy execution could lag behind its peers in the process. We believe investors should impose a higher risk premium on the stock.  Besides, the immediate challenge for the bank is to refocus on the growth of its assets as competition is only likely to increase.  Rising funding costs together with price cutting in its loans should have a negative impact on its NIMs over the next 12-24 months.

Valuations.  We  have  been  tracking  AFG's  P/BV  band  closely  to  monitor  its share price behaviour. We conclude that AFG's share price trades close to both the economy and equity market  cycles since 2007. However, AFG is now trading at +1SD above its historical mean. We think that the share price could have already factored in this M&A transaction as it is currently trading at 1.7x forward P/BV, which is within its historical M&A valuation of 1.5-1.7x BV.    Hence,  we  believe  that  the  share price could have factored in the DBS Bank acquisition premium already.  Moreover, even if we impute in optimistic earnings expectations (EPS growth of 24.4% for FY12 and 16.6% for FY13), AFG's current headline ROE of 14.6% appears justified to just command a 1.5x P/BV valuation (our targeted multiple). As such, the stock valuation hence appears less attractive at the current share price and it may also be difficult to justify higher fundamental valuations for the stock from its current level. On the flip side, this may not have factored in the operation risk into its current valuation. We are maintaining our MARKET PERFORM rating on AFG with a slight changes in our target price to RM4.00 based on 1.5x FY14 book value of RM2.67 as we roll forward our valuation year. 

The risk to our call is that the stock could potentially trade up to 1.8x-2.0x PBV (or RM4.60-RM5.10), which would be in line with the +2SD P/BV level of 1.9x (or RM4.90) should we input in a 20%-30% controlling premium to our targeted P/BV valuation.

Source: Kenanga