Following our meeting with management last Friday, our earlier concerns on possible changes in the management team have been cleared. The group's business operation should remain as usual and management reiterates that its business strategy remains clear and that there are no unusual changes in the leadership of the group as all the succession plans are actually in place. Firstly, management has submitted an experienced name to Bank Negara Malaysia as a replacement for the retiring Islamic Banking CEO, Tuan Haji Yahya.  Secondly, the group is in a process of identifying a capable candidate, to succeed Eric Lee, who has recently resigned. Management reassured that the group's business strategy under the leadership of the existing CEO, Mr Sng Seow Wah, remains clear in focusing on growing the selected market segments such as mortgages, hire-purchases as well as SME loans. We  are comforted by management's clarifications and its commitment to further grow the bank against rising competition in the sector. We are maintaining our MARKET PERFORM rating on AFG with the same target price ofRM4.00, based on 1.4x its FY14 book value of RM2.89.  

No actual revamp in the management team. Management does not expect the resignation of CFO Eric Lee and the retirement of Tuan Haji Yahya to result in any major changes in AFG's operating and business strategy. Firstly, we understand that Mr. Sng Seow Wah will continue to lead the bank and remain on the Board. Secondly, the group is in the process of identifying a replacement for Eric Lee, and thirdly, Tn Haji Yahya's replacement has already been identified and is now waiting for BNM's approval. Besides, the management also clarified that the recent departure of a few division heads were due to retirement and expiry of employment contracts. As such, the group appears to have its management intact and there are no major changes expected in the overall leadership and all top management positions are filled currently. Hence, as against our earlier concerns, management informed that the staff morale is actually high and is fully committed to support the bank's operational and corporate strategies.  The group has gained market share in March-2012 and now make up 2.44% of the industry with a total gross loan of RM24,984m (11.3% YoY). 

Eyeing low-risk mortgages and SMEs as the drivers.  The momentum of its loan growth is sustainable driven by its aims of growing SME loans by 18%, mortgages loans by high teens as well as starting up its hire-purchases lending.  Our loan growth forecast of 11% YoY for AFG is thus highly achievable with risk actually on the upside. The immediate challenge for the bank is renewed competition especially on the household products. Rising funding costs together with price cutting in its loans should have a negative impact on its NIM over the next 12-24 months. However, its strong CASA contribution to total deposits should offer some cushioning impacts. 

Valuations. We have imputed in optimistic earnings expectations (EPS growth of 16.6% for FY12 and 8.2% for FY13) given management's progrowth strategies AFG's current headline ROE of 12.9% appears justified to command a 1.4x P/BV valuation (our targeted multiple). As such, we are maintaining our MARKET PERFORM rating on AFG and target price at RM4.00 based on 1.4x its FY14 book value of RM2.89 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