This article first appeared in The Edge Financial Daily, on April 20, 2016.

Alliance Financial Group Bhd
(April 19, RM4.08)
Downgrade to hold with a target price (TP) of RM4.15: We downgrade Alliance Financial Group Bhd (AFGB) from add to hold as its valuation is no longer attractive following its strong share price outperformance. 

Its financial year 2017 (FY17) price-earnings ratio is currently at 11.3 times, close to the five-year average of about 11.1 times. 

Its current share price has surpassed our target price (TP) of RM4.15. We prefer RHB Capital Bhd for exposure to the sector. Our earnings per share forecasts and dividend discount model-based TP remain unchanged. 

The recent spike in AFGB’s share price jumped by 18.5% year to date as at April 15, significantly outperforming the 2.1% rise in the FBM KLCI. 

Over the last three months, its share price has been up 28.3%. To recap, we upgraded the stock from “hold” to “add” on Nov 9, 2015. 

We are positive on the shift in the group’s focus from pushing up loan growth to improving risk-adjusted return, especially as the industry’s loan growth is moderating and liquidity is tight. 

While this would help AFGB to reduce its margin contraction, we do not see this as a big earnings driver.  

We project net profit growth of 7.9% in FY17, an improvement relative to our forecast of a modest 0.9% rise in FY16. 

We believe the earnings drivers in FY17 are an 8.7% growth in net interest income and 4.9% increase in non-interest income. 

Meanwhile, loan-loss provisioning is expected to increase by 25.7% in FY17, narrower than the 59.4% jump in FY16. 

Return on equity is likely to be stable at 11.5% in FY16 and FY17.

The market sees the potential for mergers and acquisitions (M&As) following the change in shareholding of Langkah Bahagia, which could involve Temasek increasing its stake in AFGB, or the emergence of DBS Bank Ltd as the major shareholder of AFGB. 

We view DBS’ entry as positive, given the potential value-add that DBS can offer AFGB. However, this is still uncertain, as it is subject to the regulator’s approval. We think that it is too premature to bet on M&As for the time being. — CIMB Research, April 19