We are raising our target price (TP) to RM3.90 (based on a same 1.7x FY14 P/BV after rolling forward our valuation year to FY14, implying a 12.0x PER on FY14E earnings) and reiterating our OUTPERFORM rating on BIMB Holdings (“BIMB”). The share price has reached our previous target price early this month. BIMB is still an undervalued banking stock in our view. Its current share price of RM3.51 works out an undemanding entry price of just 1.7x BV into its 51%-owned Bank Islam that generates 14%-15% in ROEs. The possibility of its value-enhancing corporate exercises could act as price catalysts, hence unlocking its value.

Unlocking its value in STM. Syarikat Takaful Malaysia Berhad (“STM”), a 61%-owned subsidiary of BIMB Holdings Berhad (“BIMB”), has seen a 25% rise in its market capitalisation to RM1,091m for the YTD. The continuing re-rating of STM will continue to benefit BIMB’s valuation in our view. We believe BIMB could unlock its value through a divestment of STM. Recall that the group had in the past divested its stake in STM to capitalise on the strong share price performance of the latter while still maintaining majority control (at least a 51% equity stake).

Despite the share price outperformance, BIMB is still a deeply undervalued stock. Our mark-to-market analysis of BIMB’s investment in STM suggests a total current unrealised gain of RM301m. Its 61% stake in STM works out to a value of RM0.58/share with the remainder contributed by Bank Islam, a 51%-owned subsidiary as well as RM108m from the other assets category. Adjusting for its STM mark-to-market valuation, this works out to an entry valuation of just 1.7x P/BV into 51%-owned Bank Islam that generates 14%-15% in ROEs, which should worth at least 2.0x BV due its huge capacity for growth and its capability of leveraging on higher growth in Islamic banking (refer overleaf).

We do not discount the possibility of having potential corporate exercises to unlock its value. Our view is supported by the recent consent from Bank Negara Malaysia for the extension of time for BIMB Holding Berhad to commence negotiations with Dubai Financial Group (“DFG”) and Lembaga Tabung Haji (“LTAT”) in acquiring DFG’s 30.5% stake in Bank Islam. If this stake acquisition is successful, we believe that this will lead to the possibility of Bank Islam potentially assuming BIMB’s listing status (which could lead to a privatisation of BIMB then to list Bank Islam). This would be a better structure to avoid a holding company discount disadvantage in its valuation that we had argued previously. In addition, the structure would be able to avoid further capital charges falling under the newly proposed Islamic Financial Bill. This proposed structure is not new in Malaysia and has been proven to be successful and effective. LPI Capital and Public Bank, which are controlled by Tan Sri The Hong Piew for one, have separate listings and have been trading at premiums to their respective peers. In the event of values being unlocked in the banking business, both the entities will be able to avoid any conflict of interests. Investors will then have a choice to invest directly in either the banking or insurance entity compared to just in the holding company.

We are raising our target price to RM3.90 (from RM3.60 previously) based on a same targeted multiple of 1.7x FY14 book value per share of RM2.30. We believe any potential corporate actions mentioned above could act as a re-rating catalyst for the group. On the operating side, we believe its 15% ROE target is highly achievable with an upside risk even. 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. We expect to see a better asset quality as well as earnings visibility from the bank going forward. A progressive reduction in its credit costs may also boost its profitability.

Source: Kenanga