AFFIN Holdings Berhad (AFFIN) has made a series of proposals, which would ultimately lead to its wholly-owned subsidiary AFFIN Bank Berhad (ABM) assuming the listing status of AHB by 4QCY17. Based on the provided numbers (mostly illustrative), the corporate exercises could result in a slightly higher ROE and correspondingly higher valuations for the Group. However, we are somewhat neutral on this corporate exercise. Pending further details, we continue to maintain UNDERPERFORM on AFFIN.

A series of proposed corporate exercises. Yesterday, AFFIN announced to undertake a proposed corporate reorganization exercise which could see its wholly-owned subsidiary AFFIN Bank Berhad (ABB) taking over the listing status of AFFIN:-

(i) a re-organisation of AFFIN and its group of companies resulting in AFFIN Bank Berhad (ABB) becoming the bank holding company,

(ii) an exchange of AFFIN shares with the shares of its wholly-owned subsidiary, AFFIN Bank on a 1-to-1 basis; and

(iii) a transfer of AFFIN’s listing status on the Main Market of Bursa Malaysia Securities Berhad to AFFIN Bank. Ultimately the Proposed Corporate Reorganization will have the shareholders of AFFIN exchanging their AFFIN shares for ABB shares on a 1-for-1 basis where their number of shares held and percentage shareholdings in AFFIN will be same as in ABB. The Corporate Reorganization is expected to be completed by 4QCY17.

Improving efficiency and spearheading growth. ABB (from FY15 Financial Statements) holds 60% of AFFIN’s net assets, but AFFIN is the holding company for its major operating entities such as banking, insurance and money broking. According to management, the reorganization will allow the simplifying of the shareholding structure and de-layering of the corporate structure of the AFFIN group of companies. Fewer layers in the corporate structure will create the opportunity to enhance the supervision and efficiency of the AFFIN Group. The Proposed Reorganisation is also undertaken to position ABB to spearhead the banking group’s future growth.

No significant impact. The reorganization is not expected to have any material effect on the earnings of AFFIN for the financial year ending 31 Dec 2017. ABB’s forward shareholders’ funds are expected to be lower by RM469m (from AFFIN’s RM8.865b) to RM8.396b based on the proforma accounts. Hence, FY17E shareholders’ funds for the new entity is now expected to be slightly lower, thus, our estimated FY17 ROE is expected to be improved by a marginal 15bps to 5.54%. The improved ROE would warrant a higher price-to-book (PB) valuation for the new entity.

UNDERPERFORM recommendation maintained. As details are yet to be firmed up, we refrained from jumping the gun in terms of our recommendation on AFFIN. Based on the illustrative number provided, we view the proposed development as neutral. However, as we feel that Group’s asset quality will still be challenging in the still prevailing volatile environment, we maintain our UNDERPERFORM recommendation on AFFIN, for now, with an unchanged target price of RM2.20 based on blended FY17E 0.5x P/B and 8.5x FY17E PER

Source: Kenanga Research - 17 Feb 2017