This article first appeared in The Edge Financial Daily on February 7, 2020
AMMB Holdings Bhd
(Feb 6, RM3.85)
Upgrade to buy with an unchanged target price of RM4.30: AMMB Holdings Bhd’s third quarter ended Dec 31, 2019 (3QFY20) earnings are expected to improve both quarter-on-quarter and year-on-year on better revenue as well as lower net provisions.
Corporate loan disbursements, steady growth of its retail and small and medium enterprise segments as well as further margin recovery would lift net interest income. Stabilising asset quality would also lead to lower net credit cost.
The group’s inefficient balance sheet remains a key drag on its ability to grow its return on equity (ROE), characterised by a fairly large goodwill stock of RM2.8 billion in FY19. A one-percentage-point increase in its FY21 ROE would require either a more than 15% growth in earnings (unlikely given the current market environment) or a 10% reduction in book value (BV).
We are more conservative in our FY20 to FY22 estimates on lower revenue expectations and more ramped-up credit cost normalisation.
A potential catalyst is that the streamlining of the group’s balance sheet could provide an uplift to its ROE in the long term and remove the overhang of the stock. AMMB’s major shareholders’ potential divestment of their stakes in the company could also spark a rerating.
AMMB is trading at an almost historic low of 0.6 times calendar year 2020 BV, -1 standard deviation of its 14-year mean. At this level, the stock is too cheap to ignore considering a better earnings trajectory is expected after FY20 with one-off recoveries out of the way.
Key risks to our view include an inability to deliver on its strategic initiatives and economic stress impacting its asset quality, which would dent AMMB’s ability to grow its ROE organically. — AllianceDBS Research, Feb 6