INVESTMENT HIGHLIGHTS

• The share price of MBSB has surged 20% since the start of the year to high of the day of RM1.09 yesterday

• We believe the price rally of late is reflective of its FY17 earnings prospect and also related to positive expectations of negotiations on a proposed merger with AFB

• We maintain our earnings forecast at this juncture

• We downgrade our recommendation to NEUTRAL from BUY previously with an unchanged TP of RM1.08 as we believe the stock is fairly valued at current level

The share price may consolidate after a strong price action. We note that the share price of MBSB has surged 20% since the start of the year to high of the day of RM1.09 yesterday. We are not surprised that the stock has rallied to the current level as we opine negative side on the company’s past quarterly results had been flushed out of the market and eventually, its share price has reacted positively to its FY17 earnings prospect, reflecting our view on the company. The stock is expected to consolidate at this level after a strong recent price action.

Positives have been priced in. We also opine that the price rally of late is related to positive expectations of negotiations on a proposed merger with Asian Finance Bank Berhad (AFB). Recall that BNM requires that the negotiations be completed within six months from the date of BNM’s letter on 21 December 2016. Having said that, we do not see any significant impact from the proposed merger to the Company’s FY17 earnings prospect despite if MBSB were able to complete the proposed merger with AFB this year. We are of the view that it would take time for the Management to make use of the full fledge banking license. Therefore, we view all positives should have already been priced in the current rally.

Impact on earnings. We make no changes to our earnings forecast at this juncture. Our existing forecasts are based on its current nonbanking operations, which will see its FY17 earnings growth of 40% from a low base and improvement in its asset quality.

Recommendation. We downgrade our recommendation on MBSB to NEUTRAL from BUY with an unchanged TP of RM1.08. Our valuation is pegged to PBV of 0.9x, which is 1 standard deviation below its 3-year average PBV of 1.6x.

Source: MIDF Research - 17 Jan 2017