MBSB’s  Tokyo  roadshow  drew  huge  investor  interest  relating  to  the lender’s transformation story and future expansion plans.  Maintain BUY and  MYR2.60  FV  at  a 10x FY15F P/E,  as we trim our  FY14/15F earnings forecasts  by  2-3%  on  higher  operating  costs  from  Islamic  deposits. Nevertheless, the stock  is trading at  an  undemanding valuation,  with a potential re-rating as we anticipate better-than-expected non-PF growth.

• Tokyo  trip.  We accompanied  Dato’  Ahmad  Zaini  bin  Othman,  CEO of Malaysia Building Society  Berhad  (MBSB)  and his management team to Tokyo, Japan  to  meet  institutional fund managers.  Many investors were keen  to  learn  about  the  company  and  its  transformation  story.  Most questions  surrounded  MBSM’s:  i)  non-performing  loans  (NPL),  ii)  net interest margin (NIM) and funding costs, iii)  fee income avenues, and  iv) a  shift  in  its  business  model.  The company  has  emerged  as a  reputable personal  financing  (PF)  financier  among  civil  servants  following  a successful  transformation  story.  While  Bank  Negara  Malaysia  (BNM)’s tightening measures on household debt  have  impacted its  PF  business, MBSB  is  now  redirecting  its  focus  on  corporate  lending  and  targeted segments for its retail portfolio.   
• Key targets.  The management  aims  to achieve 8-12% loans growth for FY15.  It  expects  more  non-interest  income  services  with  financial advisors  promoting  takaful  and  wealth  management  products.  MBSB’s mortgage segment may see rejuvenated growth, as it has started to offer a very competitive mortgage rate at base lending rate (BLR)-2.4%.
• Maintain BUY, MYR2.60 FV. We roll over our FV to FY15 forecasts at a 10x P/E, lower than our previous 11x P/E  and at the low-end of banks’valuations, due to the  diminishing revenue potential of  its retail portfolio and  near-term  regulatory  risks.  Just  like  other  Islamic  financial institutions,  we trim our  FY14/15F earnings  forecasts  by 2-3%  following updates  of  audited  financials  and  in  anticipation  of  higher  operating costs. MBSB is expected to revamp its mudarabah deposits to MYR21bn in  FY13  from  MYR15bn  in  FY12  to  either  tawarruq  deposits  or investment  accounts  by  the  regulatory  deadline  of  June  2015.  We believe  opting  for  tawarruq  deposits  would  be  more  aligned  with  the company’s capital management strategies and its depositors’ needs.
• Catalysts  and  risks.  We  believe  a  sustained  upward  growth  trend  in corporate  lending  and  mortgages  could  re-rate  consensus  forecasts. Also,  securing a banking license  will  complete its treasury business and deposit-taking activities. The key risks  are regulatory risks and  a sudden deterioration in its asset quality and cost-to-income ratio.

SWOT Analysis

Company Profile

Malaysia Building Society Berhad (MBSB) is an exempt finance company involved in lending and deposit-taking activities.

Recommendation Chart

Source: RHB