FY20 net profit of RM269.3m (-63% YoY) is above our expectation but below consensus due to misses in costs and impairment expectations. The group seeks to expand its reach and digital capabilities while staying relevant with new offerings in the pipeline. The eventual restructuring to uplift the banking segment of the group could be a rerating catalyst. Maintain OP with a slightly higher TP of RM0.820 (from RM0.800) as we roll over our valuation base to FY22E.

FY20 above our, but below consensus, forecasts. FY20 net profit of RM269.3m came above our expectation but below consensus, making up 210% and 82% of respective estimates. The positive deviation on our part was due to our overly bearish cost assumptions and impairments during the year while the negative deviation from consensus could be due to the opposite. No dividends were declared, as expected.

YoY, FY20 net income from Islamic banking operations rose by 22%, thanks to much lower income attributable to depositors. Coupled with a 131% increase in net other income items (namely financial investment gains), total income soared by 27%. Despite operating expenses increasing by 9% on higher staff cost, CIR was recorded lower at 24.4% (vs FY19: 28.4%) backed by the higher topline. Having undergone the loan moratorium, the group registered modification losses of RM504.8m and saw greater impairments of RM420.9m (+270%) as the group provides for potential delinquencies on at-risk accounts. FY20 earnings closed at RM269.3m (-63%).

QoQ, pre-provisioning operating income was slightly offset against 3QFY20 by losses from disposals and miscellaneous sundry expenses. Meanwhile, impairments of RM111.0m (+100%) were front-loaded during the 4QFY20 period to capture more forward-looking provisions from macroeconomic overlays as management remains cautious going into FY21. All in, 4QFY20 earnings registered at RM96.8m (-63%).

Key briefing highlights. A big part of MBSB’s forward plans include greater technological involvement with regards to digitalising its outreach with its new MFast Personal Financing platform showing some promise. Additionally, to put to better use of its internal funds, the group aims to expand fee-based income revenue streams (i.e. wealth management) to reduce its exposure to financing-based income. Looking further towards 2022, the restructuring of the group’s banking entity will take the lead on its listing status which could reposition the group as a full-fledged Islamic banking institution.

Post-results, we raise our FY21E assumptions by 9.6% on the back of better net interest income gains while slightly toning down our impairment assumptions. Meanwhile, we also introduce our FY22E estimates.

Maintain OUTPERFORM with a higher TP of RM0.820 (from RM0.800). Our TP is based on a rolled over FY22E GGM-derived PBV of 0.56x (1SD below 5- year mean). The group offers investors a window to non-conventional financing business with undemanding valuations to boot. Its restructuring in the medium-term could also be a rerating catalyst to elevate the stock to a level closer to its peer (FY21E PBV 1.1x).

Risks to our call include: (i) higher-than-expected margin squeeze, (ii) lower- than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, (iv) further slowdown in capital market activities, and (v) adverse currency fluctuations. 

Source: Kenanga Research - 26 Feb 2021