Affin Holdings Berhad announced that it will be undertaking the following corporate exercises which will essentially entail:

• a reorganisation of Affin and its group of companies resulting in Affin Bank Berhad (ABB) becoming the bank holding company;

• an exchange of Affin shares with the shares of its wholly-owned subsidiary, Affin Bank on a 1-to-1 basis; and

• a transfer of Affin’s listing status on the Main Market of Bursa Malaysia Securities Berhad to Affin Bank.

Affin Bank to assume listing status

Post assuming AHB’s listing status, ABB will have 100% equity interest in Affin Hwang Investment Bank Bhd (AHIB) and Affin Moneybrokers (AMB), 51% stake in AXA AFFIN Life Insurance Berhad (AALI) and 37.07% stake in AXA AFFIN General Insurance Berhad (AAGI). 254.2mn new ABB shares will be issued for the transfer consideration of AHIB, AMB and AALI. ABB has 1,688.8mn ABB shares in issue whilst AHB has 1,942.9mn AHB shares in issue. This will result in both AHB and ABB having the same resultant number of shares in issue, thus allowing for a 1-to-1 exchange. The final transfer consideration will only be determined based on the respective carrying value recorded by AHB in its management accounts.

No change in shareholding structure

Given AHB will be able to undertake a distribution-in-specie of 1 ABB share for each existing AHB share, the effective shareholding structure of AHB will not change. Major shareholders include Lembaga Tabung Angkatan Tentera (LTAT) with a 35.4% stake, followed by Boustead Holdings Berhad (BHB) (20.7%), Bank of East Asia (BEA) (23.5%) and EPF (6.8%).

Benefits of the reorganisation

We are positive on the proposed reorganisation as it will simplify the shareholding structure and de-layering of the corporate structure of the AHB group. Fewer layers in the corporate structure will create opportunities for cost savings and better capital efficiency within the group. The announcement noted that the proposals are not expected to have a material effect on the earnings and EPS of the group for the current FY as the proposals are expected to be completed in 4Q17. As such, we make no change to our earnings forecast.

Valuation and recommendation

Removing the holding company discount, we raise Affin’s TP to RM2.90/share from RM2.60/share. This represents an implied FY17 PBV of 0.8x. Affin is currently trading at PBV of 0.7x, still a steep discount compared to industry peers average of 1.1x. While we believe the huge discount is justified due to its single digit ROEs (vs. peers’ average of c. 10%), valuations remain attractive. We are also positive on the Affin’s new transformation programme where the bank will embark on a comprehensive plan to tap on the opportunities and address the challenges it currently faces in the industry. BUY maintained.

Source: TA Research - 17 Feb 2017