AFFIN announced its proposed divestment in Affin Hwang Asset Management (AHAM) which it owns 63% for RM1.42b. The business unit is a notable contributor to group NOII but management believes that the value unlocked from the deal will elevate core banking divisions and fuel its 2025 goals. We reckon the deal is fairly priced. Maintain MP with a higher GGM-derived PBV TP of RM1.65 (from RM1.55).

Selling AHAM. In facilitating the divestment, the group is proposing to dispose its entire 63% stake in AHAM to CVC Capital Partners (CVC) for a total cash consideration of RM1.42b. CVC, a global private equity firm with approximately USD125b of assets under management, is likely seeking greater exposure in Asian markets. The sale is expected to result in disposal gains of RM1.04b (52.4 sen/share) to fund core lending business activities and working capital needs. Pending approvals by regulators and shareholders, the deal is earmarked for completion by end-3QFY22.

Management expects uplifts. With the added funds, the group’s CET1 ratio should raise to upwards of 16% (3QFY21: 13.62%). Additionally, with reinvestments into the group’s core banking businesses, management is hopeful that it would propel their strategies to expand in consumer and SME banking. Alongside other strategies to optimise the group’s financing costs (i.e. redemption of its medium-term notes), management opines that it would achieve its FY22 target of: (i) PBT of >RM1b; (ii) CASA ratio of >25%; (iii) CIR of <55%; (iv) ROE of 7%; and (v) GIL of <2.5%.

We are positive on this development, as it will help to materialise the group’s FY22 plans which we were previously sceptical about. Additionally, it is understood that the disposal will not be subject to FY22 one-off prosperity tax, which is a relief to the group. The enlarged war chest could assist the group in growing the group’s market share in which it aspires to achieve RM90b loans book by FY25 (3QFY21: RM49b). While there are no promises on special dividends from this deal, we reckon that every RM100m rewarded to shareholders would translate to an additional 5.0 sen dividend payment (2.8% yield).

Valuation-wise, we believe the price tag of RM1.42b for the entire 63% stake is favourable at 3.2% P/AUM (within regional averages of 1.3%-3.9%). It also roughly translates to an overall market capitalisation of c.RM2.3b which is close to our initial expectation should the unit be spun off instead.

Post-update, we leave our FY21E/FY22E assumptions unchanged for now, pending the completion of the divestment of AHAM. Hypothetically, the removal of AHAM could lead to a reduction of c.RM80m (or 18%) in our FY22 PATAMI and a 0.8ppt cut in ROE.

Maintain MP but with a higher TP of RM1.65 (from RM1.55). The added funds would strengthen the group’s capital management, which we reckon warrants a more favourable risk premium in our GGM assumptions. This raises our applied FY22E PBV from 0.32x to 0.34x (1.0SD below mean). Though the above development would improve the group’s medium-term trajectory, we are awaiting visible near-term delivery given its high ambitious plans (particularly to build more sustainable long-term ROE).

Risks to our call include: (i) lower-than-expected margin squeeze, (ii) higher-than-expected loans growth, (iii) better-than-expected improvement in asset quality, (iv) stronger capital market activities, (v) favourable currency fluctuations, and (vi) changes in OPR.

Source: Kenanga Research - 31 Jan 2022