INVESTMENT HIGHLIGHTS

• One-offs will likely drive 2Q19 earnings

• Indonesian operations continue to hold up well

• Investments bearing fruit

• Cost factor will continue to be a drag but will normalise

• No change to FY19 and FY20 forecast

• Maintain BUY with unchanged TP of RM6.80

Key take away. We met with the management yesterday to gather on the latest development. Below are the key take away:

• Earnings result for 2Q19 is expected to be affected by oneoff, which will be net gains

• Indonesian operation are holding up well

• Investment on technology and digitization have started to bear some positive impact

• Cost will continue to be a drag to earnings for the next two years due to the investment needed

Earnings in 2Q19 expected to be impacted by one-offs. We understand that 2Q19 result is expected to be driven by various oneoff gains which may result in an earnings uplift. Nevertheless, we were informed that these are components of “Business As Usual” earnings. These include gains from part divestment of its stock braking and enhancement to its MFRS 9 models where there is an expected net positive impact. Here we should point out that we had expected MFRS 9 may cause some volatility in earnings in the first few years of implementation as the models become more granular.

Indonesian operations looking healthy. For the Group’s operation in Indonesia, we understand that its top line are holding up well. Main contributor is expected to be the improved NIM following asset repricing. Asset quality remains stable with no expected stress in any particular sectors with the exception of a few lumpy individual accounts. This could point towards better earnings contribution from Indonesia as compared to last year. The management also noted that it expects improvement will continue into FY20. Meanwhile, the impact of the policy rate cut there is expected to be neutral or marginal improvement to NIM at best.

Investments are having a positive impact. The Group have seen its digital initiative and its associated investments are bearing some positive results. One evidence is the strong loans growth recorded by the Group. Recall, gross loans as at 1Q19 grew 7.6%yoy to RM350.7b. The loans growth continue to be supported by consumer and SME segments, in particular mortgages. We understand that this was due to new loans. Digitisation and the use of data analytics have enabled the Group to ensure faster turnaround of loan applications, more targeted approach to customer acquisition and better risk pricing.

Cost factor will be a drag but will subsequently normalise. One major drawback to the Group’s digital initiative is the large investment cost. Capital expenditure and opex are expected to be elevated in FY19 and FY20 due to the investments required. We expect that this will be a drag to earnings for the next two years. However, cost is expected to subsequently normalise. In addition, the investment will also bring in revenue enhancement. OPEX could also be contained through optimisation of resources.

Recap of guidance/target for FY19. Recall, the management will be targeting the follwoing for FY19; (1) ROE of between 9.0% and 9.5%, (2) dividend payout ratio of 40% and 60%, (3) total loans growth of +6.0%yoy, (4) credit cost of between 40 to 50bps, (5) CET1 ratio of more than 12%, and (6) CI ratio at current level. Thus far, we believe that the Group seem on track to achieve these targets.

FORECAST

We are maintaining our FY19 and FY20 earnings forecast for now given that its 2Q19 result will be release by end of next month.

VALUATION AND RECOMMENDATION

We understand that the Group could see an improvement in earnings in FY19. However, we are cognisant that this will be due to one-off gains despite it being “Business As Usual”. Nevertheless, we believe the underlying factors such as income and credit cost are improving. We also expect that the Group’s Indonesian franchise will continue to improve into FY20. Overall, we expect its earnings will continue to be book value accretive.

At current juncture, we believe that the Group’s valuation is cheap as it trades below 1x PBV. We do not believe such valuation is warranted for the Group given that we do not foresee any deterioration in its fundamentals. Hence, we maintain our BUY call with unchanged TP of RM6.80, based on pegging its FY20 BVPS to a PBV of 1.2x. In addition its dividend yield of 5.0% should provide some protection to investors from downside risks.

Source: MIDF Research - 25 Jul 2019