We reiterate our OUTPERFORM rating on AFFIN Holding ('AFFIN') with an unchanged target price of RM4.30 (based on 1.0x FY13 P/BV, implying 11.7x PER of FY13E).  The  group announced that BNM has granted approval to it to start negotiations with DRB-Hicom for the acquisition of  an equity interest in Bank Muamalat Malaysia. We continue to believe AFFIN presents an under-appreciated investment proposition. We see room for further expansion in its valuation multiple with this M&A news.

Announcement.  The group announced that Bank Negara Malaysia ('BNM') has via its letter dated 15 August 2012 granted approval to Affin Holdings Berhad ('AFFIN') to commence negotiations for the acquisition of an equity interest in Bank Muamalat Malaysia Berhad ('BMMB'), a 70% owned subsidiary of DRB-HICOM. The potential disposal of interest in BMMB is in line with the condition imposed by BNM that following the completion of the acquisition of a 70% equity interest in BMMB by DRB-HICOM on 22 October 2008, DRB-HICOM was required to reduce its  equity interest in BMMB to 40%.  

AFFIN will be required to obtain the prior approval of the Minister of Finance, with the recommendation of BNM, pursuant to the Islamic Banking Act 1983 before entering into any agreement to effect the above disposal.

Our views and acquisition rationale.  We believe AFFIN has identified Islamic Banking as a growth area in which it wants to build up its existing position in the medium to long term. In our opinion, this is a good move and probably a natural progression given that the acquisition of BMMB will be the key to the group to become a bigger player in Islamic Banking. This could be a synergistic acquisition.  The acquisition of BMMB, if successful, is expected to allow AFFIN to add BMMB's 58 branches into its existing branches networks and enable AFFIN tap into BMMB's  existing business collaboration with DRB-Hicom, in particularly with Pos Malaysia and Proton.  

Assuming a 100% stake acquisition in BMMB is worth as much as RM2.0b with a P/BV valuation of 1.4x, which is in line with recent commercial and investment banks merger multiples, the acquisition could lead to a marginal earning enhancement as the ROI of 10.4% is above AFFIN's existing ROE of 9% (assuming a 30% equity financing and 70% debt financing at a financing rate of 4.5%).   

Business overview.  BMMB is principally engaged in all aspects of Islamic banking business and related financial services in accordance with Shariah principles.  The bank has a network of 58 branches all over the country with strategically located Automated Teller Machines (ATMs). Its collaboration with DRB-Hicom Group, in particular, with Pos Malaysia, has brought added strength and stability to the institution.

Financial review.  BMMB registered a PBT of RM124.1m for the year ended March 2012, lower by 39% YoY, despite recording a moderate growth of 6% in total distributable income.  The decline in profit was partly attributed to the higher income attributable to depositors by RM64m as a result of the increase in its total customer deposits by 12%. Being a relevant Islamic banking player, BMMB has maintained its core business well and has expanded its financing base from RM7.1b (March 2011) to RM9.0b (March 2012). Total assets of the group grew 12% in the twelve-month period to RM20.5b (from RM18.3b in the previous year) with total shareholders' fund of RM1.43b.

Source: Kenanga