Recently, Bursa Malaysia rallies as a result of bullish prospect of gloves sectors and increased participation of retail inventors. While most are eyeing on the hot-pick sector, let's avoid the hype and spot hidden gem with unleashed potential.

THE COUNTER IS MBSB (1171).  

MBSB investors may lose their patience in holding the shares of company due to its enduring underpeforming share price since 2015.Its downtrending share price vis-a-vis other competitors may deter potential inventors from buying its shares.  

INTERNAL: Restructuring in progress

(1) The company acquired Asian Finance Bank in 2017 and was transformed to be an Islamic Bank entity with asset size MYR 43.7 billion (second to BIMB) in 2018 Q2. While it is just at the initial stage, high CAPEX in operation and initiation of impairment for substandard assets are expected in order to enhance the company's financial position. A 3-year write-off of MYR 600 million loans definitely will have a direct impact on the earnings in accounting context. However, on the other hand, a write back is possible to book in the profit should the bad loan "recovers". Referring to the below FY18 and FY19 results, the earnings were bumpy from the lowest MYR 85.686 million to MYR 356.686 million due to the accounting adjustment of impairment loss since 2018 2Q. 

 https://www.thestar.com.my/business/business-news/2018/06/26/mbsb-done-with-cleanup

https://www.malaymail.com/news/money/2018/04/02/asian-finance-bank-now-officially-mbsb-bank-looks-to-adopt-fintech-into-bus/1613163

(2) The vigorous expansion requires increased capital base to fulfill the capital adequancy ratio as per BNM's requirements. The company proposed MYR 10 billion SUKUK and introduced dividend reinvestment plan for 3 times since 2018 for fund raising purpose. The enlarged shares base will also lead to the dilution of EPS given a sluggish earning performance for the time being. Such practices look unfavourable from investors' perspective in short term. But, it is necessary to allow the company to reap the long term handsome return in future.

https://www.theedgemarkets.com/article/mbsb-bank-eyes-fundraising-grow-business-and-boost-capital

https://www.thestar.com.my/business/business-news/2019/11/21/mbsb-proposes-rm10bil-sukuk

EXTERNAL: Turbulent Time Ahead during Post COVID-19

(1) Overnight Policy Rate (OPR) was reduced to 1.75% (lower than 2008 Asian FInancial Crisis). This means the net profit margin of bank will be further compressed in short term. Quote a study from a research analyst, " the impact would be short term, it will put mild pressure on the sector’s earning margins by 1% and 3%, while the impact on most banks’ net interest margin will be between two and four basis points (bps), for every 25bps points cut in the OPR" . 

https://themalaysianreserve.com/2020/02/14/opr-cut-will-compress-banks-earning-margins/

(2) The six months loan repayment moratorium will directly affect the company's FY20 2Q earnings. This can be seen from the latest FY20 1Q quarterly report which shows a net loss due to expected credit loss 191% vs LY. It is expected that next quarterly report will show a much poorer results associated with the spike of expected credit loss. 

Prospects Ahead

The earnings estimates will remain weak until 2021. Having pointed out a number of negatives factors, on the other hand, there are some positive highlights as follows:

(1) Islamic Banking Superlative Growth Potential

Islamic banking is a blue ocean and has been outpacing the conventional banking. Its potential is yet unleashed as the industry has just started developing in recent years. Islamic products and services can specifically cater the demand of customers who uphold and practise religious principle and values in routine. This is exactly well-matched with the current increasing trend of religious conservatism among the local islamic community. If almost half of the 61% of Muslim population in Malaysia opts for islamic banking, the growth potential is much larger than what it is right now. 

Another notable point is islamic banking is relatively more resilient in term of asset quality as compared to conventional banking. 

https://your.fitch.group/rs/732-CKH-767/images/Fitch%20-%202019%20Malaysian%20Islamic%20Banking%20Overview.pdf?mkt_tok=eyJpIjoiWW1JeFlURTFORFJsTldGaCIsInQiOiJaV1Z3b0VyTXdjRnR4VFN1WHVUcEt4dkxNblFxeWVBUE1Ld3V3aG1QTVZMdFJrSzhZNmx4dWFMMnFnM2l2clAzME0rdW1ob2FmekRMeENhTnJ4bTdmZz09In0%3D#:~:text=Healthy%20Financing%20Growth%3A%20Malaysia's%20(A,ones%20%E2%80%93%20and%20a%20supportive%20regulatory

(2) Business Growth from Non-interest Income and  Resilience against OPR Cut

Being a full-fledged islamic bank, the company will be able to generate more incomes from a variety of new products and services. Once the entire operation system is stabilized and thrives, a whooping profit is expected. 

In addition, despite the worry that banking sector's profit will be compressed as a result of OPR cut, the company will be able to cushion against such adversity given the fact that almost half of the financing are at fixed rates.This can be seen at the latest annual report's statement shown below.    

(3) Major Shareholders' Endorsement

EPF is the largest shareholder of the company. As being committed to return of 4%-5% p.a. for EPF account holders, it by all means will make MBSB a great success in order to ensure sustainable growing dividend income. It is less likely to cease any dividend payout (despite financial strain) like how European and UK banks do currently.   

This counter can be a choice for potential investors who favour syariah-compliant theme. 

Another highlight point is #8 largest shareholder who is well known to Chinese-reading investors in Malaysia.   

(4) High Dividend Yield and NTA per Share 

Current NTA per share is MYR 1.26. Share price is only MYR 0.61. Price to book ratio is only 0.48. Suppose dividend remains MYR 0.03, this represents dividend yield 4.90% which is more attractive than current deposit rate. When the economy recovers and the company's earnings improve, should the dividend payout increase to MYR 0.05, dividend yield will grow to 8.20% (Of course this is just a simplified assumption).

Furthermore, the company's ROE has been improving since 2016. 

The share price is deeply undervalued now.  

(5) Quality Customers Base 

Despite challenges, the company aims to grow it loan business by 3% - 4% in FY20. Thanks to its close tie with the Government in the past, the company has a strong base of civil servants borrowers. As civil servants did not face pay cut or retrenchment during the MCO period, it makes sense for the company to target on this group of borrowers with relatively lower credit risk vis-a-vis those from private sector. 

https://www.mbsbbank.com/storage/misc/Moratorium%20Related%20Costs.pdf

We do note that personal financing constitutes the highest portion of total financing. It has less exposure to high-risk oil and gas sector. In mid term, the company will strategically grow its corporate financing (eg. trade financing is a new sector that MBSB targets in mid term).  

The impact of moratorium is exaggerated by most inventors after reading the latest quarterly report. However,it has to be careful to differentiate the concept of expected credit loss and actual loss.

Referring to the quote from the CEO "During moratorium, there was a lot of mismatch on how we look at cash flow and accounting standard. The mismatch will result in modification loss and NCL (net credit loss). The modification loss is the main culprit whether to incur loss or reduction in profit," (https://www.nst.com.my/business/2020/06/604786/mbsb-targets-40pct-loan-growth).  

It is just a matter of accounting adjustment on the book. The company's continuous customer engagement will be helpful to encourage customers to regularize their instalment arrears. When all these thousands of millions ECLs are written back, the profit registered in the book will hit record high after the economy recovers from the COVID-19 pandemic in the following years.   

A Brief Comparison Study

Market Cap MYR 6,364 million

NTA/Share $3.40, EPS

FY19 Revenue MYR 4,885 million

Market Cap MYR 3,897 million

NTA/Share $1.26

FY19 Revenue MYR 3,199 million

BIMB is 1.63 time in term of market cap, 2.70 times in term of NTA/Share, 1.53 times in term of FY19 revenue, larger than than MBSB. Both market capitalization and revenue have high correlation.

Suppose:

(1) MBSB is completely transformed to be a true islamic Bank by 2021 and all the necessary expenses are normalized in the following 3 years, 

(2) The profit margin on average is normalized to18% (BIMB's reference)

(3) Not include any superlative growth from new banking products and services categories 

The price target of MBSB is conservatively estimated to be MYR 1.00 (64% uplift)    

Remember first mover advantage?

Disclaimer:

This is neither a buy nor sell recommendation. Invest at your own risk.