INVESTMENT HIGHLIGHTS

• 100% proposed acquisition of AFB

• Price tag of RM644.95m via combination of shares and assets

• Asset and liability to be transferred to AFB

• Expected to operate with new banking platform in 2QFY18

100% proposed acquisition of AFB. The Group moved a step closer to become a full Islamic financial institution after previous two failed merger attempts; with Bank Muamalat, and with CIMB Group and RHB Bank. Yesterday, the Group announced that it will acquire 100% Asian Finance Bank (AFB). The proposed exercise will result in the acquisition of AFB’s deposit taking license. The full bank license will allow MBSB to tap into financial services which it currently could not offer (such as trade facilities, CASA deposits and interbank instrument).

Price tag of RM644.95m via combination of shares and assets. The purchase consideration for the acquisition is RM644.95m. This represents a PBV of 1.3x based on net assets as at 31 December 2016 of approximately RM497.26m. The purchase consideration will be satisfied through a combination of cash amounting to RM396.9m (“Cash Consideration”) and the issuance of 225.5m of new ordinary shares in MBSB (“Consideration Shares”) at an issue price of RM1.10 per consideration share.

Valuation of the merger seems fair. We believe that the valuation of the merger is fair. Our view is premised on valuation of previous financial sector mergers of approximately 1.4x PBV.

Asset and liability to be transferred to AFB. Pursuant to the merger exercise, MBSB will transform its status to a full-fledged Islamic Bank. The Group is expected to emerge as the second biggest Islamic bank in Malaysia after Bank Islam, with total estimated assets of RM44b. The transition of MBSB into Shariah status will require the company to transfer its Shariah-compliant assets and liabilities (“A&L”) to AFB in tranches. All the residual conventional financial A&L which cannot be converted into Islamic A&L will be disposed to third parties. MBSB is expected to obtain its full Islamic status in two to three years’ time pending the completion of this transfer consideration.

Dilutive effect but the Group potential for growth is better. In terms of the new share issuance, the dilutive effect will be minimal. Assuming a shareholder with 10% stake in the Group, post-merger the shareholding will drop to only 9.6%. In addition, we believe that the merger will enhance the Group’s growth potential, which would increase its future value and compensate the dilution.

Focus. MBSB’s forward strategy now will be to enhance its focus on upgrading the company’s digital capacity to improve the existing business and operating model. The new banking platform will leverage on digitalization to capture fee-based income from both consumer and corporate. Additionally, the company is expected to solidify its presence in the niche segments which are primarily comprised of property, housing and infrastructure.

More rooms for growth… We believe the acquisition of banking license will stimulate an upward trajectory of MBSB’s operating income. This is premised on the new banking platform of MBSB, which is now able to offer Islamic universal banking services to both retail and wholesale banking customers such as, amongst others, wealth management, foreign exchange, investment banking, debt capital management and trade finance.

…leveraging on consumers’ demand. The future looks rosy for MBSB given the encouraging progression of Islamic finance in the region. With Malaysia being an important part of Islamic finance development, MBSB is poised to benefit in the long run both locally and internationally. This is taking into account the growing demand for Islamic financial products as well as favourable consumer demographic in Malaysia. As such, this positive trend provides a vast array of opportunities for MBSB to grow, with Shariah-compliant financing expected to account for 40% of total financing in Malaysia by 2020.

Impact on earnings. The proposed acquisition will not have any material effect on our FY17 earnings. This is premised on the expectation that the proposed merger will be completed in 1QFY18. Also, we opt to maintain our earnings forecast for FY18 at this juncture pending further management guidance on the expected earnings contribution after the completion of the proposed merger. Accordingly, management informed that guidance will be made available in CY18.

Valuation and recommendation. Pending the completion of proposed merger, we maintain our TP at RM1.50. This is pegging its FY18BVPS to PBVR of 1.1x. We believe that the merger will bring in long term benefit for the Group. The most obvious advantage will be that the ability to expand its business through more variety and diversity in terms product offering. We expect that the management will also be able to manage cost of fund better will the ability to attract CASA. Given its positive outlook, we reiterate our BUY call on the stock.

Source: MIDF Research - 7 Nov 2017