Affin Holdings Bhd
(March 10, RM2.93)
Maintain market perform with a target price (TP) of RM3.07: Affin Holdings’ financial year 2014 (FY14) net profit fell by a smaller-than-expected 6.9% year-on-year on a strong showing from the non-interest income segment (NOII) (+62.3%) helped by RM44.2 million in contribution from the asset management arm of Affin Hwang Capital post-completion of its integration on Sept 20, 2014.

The decline in FY14 net profit was primarily the result of: i) a jump in the cost income ratio to 53.9% (+6.9 percentage points [ppts] on integration costs relating to the Hwang-DBS Investment Bank Bhd merger; ii) an increase in finance cost (+45%); and iii) a higher effective tax rate of 25.3% (+1.4 ppts).

Net interest income (NII), on the other hand, took a back seat this FY14, managing only a small 3.5% gain to RM949.2 million. The management revealed that the sluggish growth was caused by a slip in net interest margin (NIM) to 2.02% (-eight basis points [bps] owing to stiff competition in terms of loan and deposit pricing. Further NIM compression appears to be anticipated.

Moving forward and in view of the increasingly challenging operating environment, the company has chosen business sustainability as its strategic focus. Identified initiatives include: i) controlled loans growth; ii) maintaining and preserving asset quality; iii) competitive funding strategy; iv) increased contribution from fee income; and v) capital conservation.

The initiatives suggest that there could be some redirection of focus away from the company’s core interest income segment towards growing its NOII, especially with the completion of the merger of the investment banking (IB) and asset management (AM) operations of HwangDBS Investment Bank in September last year.

Now branded as Affin Hwang Capital, the management aspires for each of the segments under its IB and AM businesses to be ranked top five by 2019. As at FY14, we estimate the IB and AM business contributions to be about 20% of total income.

While growing the NOII business could cushion against slower NII growth, we have yet to see if the segment will be able to propel significant growth to carry the weight of a softer NII, especially given the weaker capital markets. Hence, we are keeping our earnings estimates for now and maintaining “market perform” on Affin.

Our FY15 and FY16 forecasts impute a more conservation 30% to 31% NOII contribution to total income versus FY14’s 35%, while representing a 5% step up from the FY11 to FY13 average of 25%. The TP is unchanged at RM3.07, based on a FY15 estimated price-to-book P/B)/price-earnings ratio (PER) of 0.8 to 8.8 times. The P/B ratio applied is based on the company’s historical share price performance which traded in the range of 0.8 to 0.9 times P/B ratio when return on equity was hovering around 6.5% to 9.5%, whereas the PER ratio applied represents the company’s average three-year historical PER ratio. — Kenanga Research, March 10

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