2QFY22 Pre-results Update Price : RM5.22

Target Price : RM5.70 ↔ By Clement Chua l clement.chua@kenanga.com.my

We maintain our GGM-derived PBV TP of RM5.70 (COE: 11.7%, TG: 2.0%, ROE: 10.5%) and OP call. The group stays cautious, on implications of prolonged macro uncertainties, in its sell-side hosting yesterday. At the very least, Indonesia operating landscape appears more buoyant as cued by CIMB Niaga’s recent 2QFY22 results. We believe its fundamentals are underpriced at current share price level, with the group expected to outperform pre-pandemic level. There is no adjustment to our TP based on ESG of which it is given a 3-star rating as appraised by us.

CIMB hosted a sell-side 2QFY22 pre-results briefing yesterday. Key takeaways are as follows:

- Asset quality manageable but with minor pains expected. The group noted that TRA numbers are improving (June 2022 at 4% of total loans vs April 2022 at 5%), indicative of stable economic environment allowing for gradual recovery. However, the group is cautious of cascading impacts from prolonged global uncertainties which we believe may strain certain vulnerable sectors (i.e. low income groups, SMEs). Additionally, heightened OPR is likely to pin down demand and affordability.

- Provisions could see some tightening. Considering the above, CIMB intends to induce further management overlays and will update its 60-70 bps credit cost guidance with its 2QFY22 presentation. This will likely skew towards commercial and consumer accounts. Large corporate accounts are possibly unaffected as said accounts are sufficiently provided for at this juncture. No further booking from 1QFY22’s double crediting issue is expected although recoverability here is expected to face some hurdles.

- Sequentially better NOII. Progressive (albeit marginal) improvements could be seen on the back of better fees income and loans recovery. That said, this is offset by poorer performing forex and investment trading segments. The group noted that it marked higher adjustments in the recent quarter to better yielding bond holdings. Still, the comparative strength of FY22 is unlikely to come close to FY21’s.

- Lazada’s RM750m funding in TnG Digital would not stir revaluation gains. Recent reports have highlighted Lazada’s investment in TnG Digital; however, no further information was shared with regards to the allocated stake or valuations ascribed. Still, the group reaffirms that this transaction should not translate to significant one-off revaluation gains. We see collaborations between these two companies to ultimately be a boon as it provides direct participation into the ecommerce space while fuelling consumer dependence on TnG Digital’s ecosystem.

(refer to the overleaf for commentary on CIMB Niaga’s 2QFY22 results)

Post updates, we leave our FY22E/FY23E assumptions unchanged.

Maintain OUTPERFORM and TP of RM5.70. Our TP is based on a GGM-derived PBV of 0.88x (COE: 11.7%, TG: 2.0%, ROE: 10.5%). While there is near-term conservatism held by the group, we see technical buying opportunities due to shares sell-down triggered by the Feb 2022 double crediting issues that has yet to fully subside. We believe such events are highly exceptional and unlikely to reoccur. Additionally, its firm cost management should prevent unforeseen overrun to significantly dampen earnings. CIMB registered the strongest YoY EPS improvement amongst its peers (31% vs. 20%). A FY23 dividend return of 6% could be tempting to yield seekers.

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) slowdown in capital market activities, (v) unfavourable currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 28 Jul 2022