Post-briefing, we continue to opine that the stock lacks re-rating catalysts. Key takeaways were: (i) challenging operating environment in Indonesia, (ii) 2014 KPI targets may be revised downward, and (iii) its capital market activities remain lethargic. That said, we leave our forecasts unchanged, pending its 2Q14 results release later this month. All in all, we maintain our MARKET PERFORM rating and RM8.00 TP on the stock. We also reckon that the on-going merger talks with RHB and MBSB might not bode well for investment sentiment and its share price performance in the near-term.
Operational headwinds in Indonesia. Management painted a bleak outlook for CIMB Niaga given the current tight liquidity condition in Indonesia. Notably, its 1H14 loan-to-deposit ratio (LDR) is already stretched at 99% and hence, loan growth is expected to moderate (+8-9% YoY vs original target of +15% YoY). Additionally, net interest margins (NIMs) is likely to face some pressure (-30bps YoY) as banks race to augment their deposit base. Besides, earnings are seen to be capped by higher credit cost as asset quality deteriorates. Management reiterated its 80-90bps credit cost guidance, suggesting higher loan loss provisions in the next two quarters (1H14: 70bps).
Possible revision to KPI targets. Given mounting headwinds at its Indonesian operations (making up ~30% of PBT), we think there could be downward revision to its 2014 KPI targets during the Group’s 2Q14 results announcement. For now, CIMB maintains its overall loan growth guidance of +14% YoY. As for NIMs, management expects NIMs in Malaysia, Singapore and Thailand to remain resilient while Indonesia is likely to dip (as explained above). Lastly, cost-to-income ratio (CIR) is targeted at 55% but tepid income growth so far may derail its plan (1Q14: 57%).
As for capital market activities, we gathered that its fixed income division has been relatively quiet in the 1H of the year but has started to pick up steam in July, thanks to the 25bps rate hike. On the flip side, its equity business continued to be lethargic in the absence of large-scale IPO.
Limited comments on M&A initiative. Management was tightlipped revolving questions around the proposed merger with RHB and MBSB. They also did not elaborate much on their efforts to make inroads into the Philippines.
Forecasts & risks. We leave our forecasts unchanged, pending the 2Q14 results release later this month. Key risks include: (i) slower loans growth, (ii) deterioration in asset quality, (iii) weaker NIMs and (iv) unfavourable forex movements.
Maintain MARKET PERFORM, TP: RM8.00. We expect the trading sentiment for CIMB to remain lacklustre due to the on-going merger talks with RHB and MBSB. Furthermore, the bleak outlook on its Indonesian operations could potentially force the Group to revise down its KPI targets. Hence, with lack of re-rating catalysts on the horizon, we maintain our MARKET PERFORM rating. Our TP of RM8.00 is unchanged for now, computed based on a blended average of 1.8x FY15 PBV & 13.5x FY15 PE.
Source: Kenanga
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