Post-MIDF merger, we raise our GGM-derived PBV TP to RM0.67 (COE: 9.7%, TG: 2.0%, ROE: 6.5%) from RM0.51, previously. The enlarged MBSB seeks to reap synergistic gains with the integration of consumer banking, development and investment banking units to bolster its suite of offerings while optimising its combined operating frameworks. However, due to the expected implementation period and shareholder dilution from the exercise, current price points could indicate the stock has been overbought. Hence, we maintain our UNDERPERFORM call.

Reasonable deal for MBSB. To recap, the acquisition of MIDF at a share swap consideration of RM1.01b is satisfied via the issuance and allotment of approximately 1.05b new MBSB shares to Permodalan Nasional Bhd (PNB), the sole shareholder of MIDF. This translates to an issue price of RM0.9652 per MBSB share or 0.83x FY22 PBV. Ultimately, PNB would own 12.8% of the enlarged MBSB Group.

While the transaction value could have been on the higher end at PNB’s expense as MBSB traded at c.0.5x prior to the deal, we opine that the fund had a longer-term stance in terms of incremental value and earnings accretion made possible from the deal. With the merger, MBSB would shape up to be a full-fledged bank with complete end-to end banking services.

MIDF acquisition to fill the gaps. MIDF’s strong suit revolves around development finance, investment banking and asset management. While MBSB has established a notable presence in the former, it lacks the licence to offer the remaining solutions. The addition of wider corporate and investment banking capabilities could present MBSB as a more desirable financier to SMEs and large corporations, where the group has been aggressively striving to play a bigger role. Meanwhile, a new asset management unit could open wealth management offerings to retail customers with hopes of increasing their stickiness. Based on their respective 1QFY23 books, 71% of MBSB’s financing portfolio comprises retail banking while MIDF has only 33%. That said, MBSB’s total financing portfolio amounts to RM39.2b as compared to RM2.0b from MIDF.

Long road ahead with fruitful journey expected. Their respective portfolios reflect minimal overlaps in terms of product offerings and hence could see more complementary benefits. At the same time, it also presents an opportunity to consolidate and optimise backend operating functions. Jointly, we could possibly see better top line delivery on the back of more efficient operations. The group opines that it may require at least a year post-completion to sync the two entities before it is able to implement the abovementioned growth strategies. A successful execution could lead the enlarged bank to come closer to delivering double-digit ROEs, as aspired by the group.

Forecast. We introduce a refreshed FY23F earnings of RM473.5m, being -35% from our prior assumptions. While this presents 1QFY23 earnings of RM74.1m to only make up 16% of said full-year assumptions, we opine the remaining periods could be lumpier mainly on the back of lower tax burden. That said, we believe challenges on the group’s income will persist given its unfavourable fixed-to-variable product mix while credit cost may stretch further to bolster the group’s loan loss coverage ratio. On the flipside, owing to the share dilution from MIDF’s acquisition, EPS could see a 10% degrowth.

Meanwhile, we introduce our FY24F earnings of RM539.5m, representing a 14% improvement including the positive injection of MIDF’s earnings, which we project could report at c.RM40m. MIDF saw solid earnings in its FY20 (RM77.2m) and FY22 (RM76.4m) but it may be weighed down by a poorer interest margin mix, similar to MBSB.

Maintain UNDERPERFORM but with a higher TP of RM0.67 (from RM0.51). Our TP is based on a GGM-derived PBV of 0.58x (COE: 9.7%, TG: 2%, ROE: 6.5%) from 0.39x, previously. We also roll over our valuation base year to FY24F’s BVPS of RM1.15. Investors have rallied strongly on the back of strengthened prospects fuelled by the inorganic growth and synergistic benefits to be reaped from the nearing completion of the MBSB-MIDF merger. However, we believe the enlarged group may require some time to implement its strategies to yield its desired growth trajectory. Our immediate-term ROE expectations linger at just above 5%, which indicates that the group’s double-digit target requires a doubling of earnings and a prolonged period to meet. Hence we believe the risk-reward for the stock is somewhat unfavourable at current price points, notwithstanding the erosion of dividend yields owing to its prior strong buying interest.

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

Source: Kenanga Research - 8 Aug 2023