BIMB Holdings ('BIMB') held an analyst briefing yesterday chaired by its Group Managing Director / CEO, En Johan Abdullah. We came back with the view that the group is likely to see a good earnings growth in 2H12 with risk biased to the upside as the group had reduced its stake in Syarikat Takaful Malaysia ('STM') by 3.12% to 62.1% over the last two months.  Its upcoming earnings growth will be even stronger  as compared to 1H12.  The strategic decision in capitalising on the upward trend in Takaful Malaysia's share price performance will benefit BIMB's profitability and valuation. The current share price of RM3.09 works out to an undemanding entry price of just 1.36x BV into its 51%-owned Bank Islam.  As such, we believe BIMB is still deeply undervalued and we do not discount the possibility of some corporate actions by the management to unlock its value. BIMB continues to be our dark horse pick in the banking sector.

Unlocking its value through STM divestment.  The group is starting to divest its stake in STM to capitalise on the strong share price performance of the latter while still maintaining a majority control (51% equity stake).  As at 7 September 2012, the group has divested a 3.12% equity interest in STM or 5.08m shares, at proceeds which could be as much as RM30m. STM has tripled its market capitalisation to RM1.0b from RM326m in Dec 2011, and is currently trading at a forward consensus PER of 12.9x FY13 earnings and at 1.6x P/BV.  

Patience will Pay-off.  According to its MD, Encik Johan, the group will continue to explore various strategies to enhance stakeholders value, including the possibility of its 51% owned Bank Islam assuming BIMB's listing status.  As such, we do not discount the possibility of potential corporate actions by management ahead to unlock the value of the group. 

In addition, Bank Islam's management is expecting to achieve a higher financing growth target of 25% YoY by end-FY12 with a better Financing-to-Deposit ratio of 60%. Its higher than  the industry's 13% financing growth will mainly be contributed by ETP-related projects.  As such, we still expect Bank Islam to deliver a faster balance sheet growth and achieve a better asset quality similar to its peers in 2-3 years time.  Bank Islam is also aiming to add 9 new branches, including 4 new consumer banking centres, by end-2012 for a total of 134 branches.  

Going forward,its unique positioning in the Islamic banking and Takaful areas should also enable BIMB to deliver a faster balance sheet growth than other commercial banks as it captures the growth opportunities arising from Malaysia's ongoing development of Islamic banking. A strong deposit funding and ample room to leverage up its lending activities in Islamic loans also support a NIM expansion for the bank, which has a Financing-to-Deposit ratio of only 56%.  

We are maintaining our target price at RM3.60 based on a targeted multiple of 1.7x its FY13 BV per share of RM2.10. We believe that any potential corporate actions mentioned above could act as a rerating catalyst for the group. On the operating side, we believe its 12% ROE target is highly achievable despite the current gloomy environment. We also like the stock as its may achieve an asset quality similar to its peers in 2-3 years time on better management of its assets. A progressive reduction in credit costs may also boost its profitability.

Source: Kenanga