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This article first appeared in The Edge Financial Daily, on November 11, 2015.

 

Alliance Financial Group Bhd
Nov 9 (RM 3.67)

Maintain buy with a target price of RM4.50: We believe Alliance Financial Group Bhd (AFG) will remain nimble in navigating the adjustments that are taking place in the economy. In particular, we like its niche in the small- and medium-sized enterprise segment and the focus on mass affluent as well as the high-net-worth affluent base. 

Its stock has retraced 23% since its height in February 2015. Valuation is also attractive at 1.18 times price per book given its quality asset base.

Alliance_fd111115_theedgemarkets

We view AFG as an undervalued (upside 23%) stock and despite share price weakness, the upcoming second quarter financial year 2016 forecast (2QFY16F) results (to be released after Nov 15) will likely continue to reflect sound operations, with no unexpected negative surprises. 

To recap, AFG’s management reiterated its target of achieving a higher medium-term return on equity of 13% to 14% against an annualised 11% as at 1QFY16. 

This will be achieved via: improvement in the “risk-adjusted returns” (RAR) model; improving balance sheet efficiency through boosting current account-savings account ratio; and enhancing customer fee income growth in wealth management and business banking.

With the above-mentioned strategies, it is not surprising that AFG’s management has actually set a lower loan growth target of 7% to 8% for FY16, which is lower than FY15’s loan growth of 14.7%. 

The management believes that net interest margin (1QFY16: 2.16%) could eventually improve as capital and deposit funding can be better managed to finance higher return on assets. In fact, through the RAR model, AFG does not need to keep chasing after deposits, hence resulting in group cost savings.

AFG currently has a provision cover of 105.4% while credit cost guidance for FY16 remains at 28 basis points on a normalised basis (recoveries are not expected to be significant). Balance sheet is well capitalised, hence minimal capital-raising requirement in the near term. — Affin Hwang Capital, Nov 9

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