AmBank Group’s (“AMBANK”) share price has underperformed in 2012 due to the fears of a dilution in its earnings per share following its pricey Kurnia Insurans and MBF acquisitions. The stock is now trading at the lowest point of its historical PER band as well as its P/BV band over the last five years. Its FY13 P/BV is also now at a 12.5% discount to its historical average of 1.6x. We, however, expect the share price to play catch-up in 2013. This is because AMBANK has clearly demonstrated a track record of delivering quality and consistence growth in its ROE under ANZ’s leadership. We continue to rate AMBANK as an OUTPERFORM with an unchanged TP of RM7.40, implying 1.7x FY14 PBV or 11.7x FY14 PER.

Since we believe that the banking sector rally is far from over, some of the laggards should hence catch up. Our view is underpinned by the buoyant domestic economy where we remain convinced that an infrastructure investment cycle is underway in Malaysia. The balance sheets of the domestic banks are largely Basel III-ready, liquidity is good and asset quality is solid. Against this backdrop, AMBANK is still trading at relatively high PER and PB discounts to the sector while offering a net yield that is 50bp higher than the overall market yield of 4.5% for 2012.

Deserves a rerating. While the stock used to be a favourite among investors, interest has dwindled on it due to the following reasons: 1) uncertainty over its dividend yields going forward, 2) concerns about possible dilutions, 3) its limited potential to deliver earnings surprises versus its other peers and 4) its premium valuations. However, we believe that AMBANK is poised for a rerating as these concerns should be put to rest by the likely continued growth of the group post its recent acquisitions and from the factors highlighted below.

Basel III developments bode well for dividends and should quell cash call fear. AMBANK is expected to offer one of the highest net dividend yields of 4.0% in FY13 (4.8% in FY14), based on a conservative 40% payout, in our Malaysian banks stock universe (versus the market average of 3.5%). We see potential upside to its dividend yield as well, should AMBANK clear the new Financial Bill requirements. We believe that there is still plenty of investor appetite for high-yielding stocks and expect AMBANK to rerate given the growth in its dividend yield above.

With less scope for substantial earnings surprises for the other banks, the focus could shift to AMBANK. Having already seen some substantial upgrades in the consensus earnings for other banks in the past on credit cost improvements, there is now limited scope for them on this catalyst compared to AMBANK. In fact, AMBANK has achieved a loss charge rate below its 25bps guidance in FY12 and hence, there could be upside to the consensus earnings estimate for FY13 in our view as the market starts to price this factor into its earnings.

Valuation premium has diminished. As AMBANK’s share price has substantially lagged behind its other banking peers, the stock now trades at the lowest PER among the large-cap liquid banks under our coverage. We are choosing the stock as our top pick in 2Q13 among all the banks under our coverage. AMBANK’s FY14 PER of 10.0x is also now at a 14% discount to the industry’s average PER of 11.6x and its peers like Maybank’s FY13 12.1x/ CIMB’s FY13 11.6x/PBBANK’s FY13 13.4x and HLBANK’s FY13 14.3x. It is also at a 13% discount to its historical average PER of 12.6x.

Source: Kenanga