CIMB Group Holdings Bhd
(July 11, RM5.34)
Maintain outperform with an unchanged target price (TP) of RM6.25: Coming from a recent meeting with the management, we reiterate our TP of RM6.25 with an “outperform” call premised on its undemanding valuation and strategic growth in Asean. The current climate has led to attractive valuation and with its current positioning, CIMB Group Holdings Bhd is poised to make further inroads into Asean.
Under the current Forward23 strategy, CIMB’s focus will be to strengthen its presence in the fast-changing banking landscape, embracing the Industrial Revolution 4.0 and the disrupters’ challenge. The Asean market is its oyster with presence in all 10 countries, the latest being the Philippines. Although we are cautious about its aggressive expansion as trade friction and uncertainties prevail, we are positive on its foray, especially in the Philippines, with a light model strategy and spearheaded by digitisation. In preparing for the Industrial Revolution 4.0 and disruptive technology, the group’s foray into the Philippines via digital banking will lower cost, build its customer base slowly but surely and at the same time enhance its experience in the digital economy. While in the mature Indonesian and Malaysian markets CIMB has the dominant and competitive advantage, the Singapore and Thailand markets will see CIMB pursuing a niche and selective strategy. While CIMB sees great opportunities in Vietnam, it is cautious about its foray into the market, given the competitive and regulatory environment. We understand that the group is competing in the market in a measured way, reassessing constantly for the right opportunity and we would not be surprised if the same Philippine strategy is adopted when regulatory condition is eased. We also do not discount that given the right price, potential mergers and acquisitions (M&A) would emerge.
While it is dominant in the home market’s wholesale banking, we believe CIMB will look to grow opportunities in the consumer and retail small and medium enterprise (SME) segment. We understand that this strategy will also apply to Indonesia, targeting the fast-growing retail SME, high-end and mass affluent markets. We understand also that by leveraging its digital expertise, digital banking will be vigorously expanded in Indonesia. Riding the expected infrastructure spending in Indonesia, it expects the corporate segment to be widened, and is pursuing this segment competitively given that its cost of funds has significantly dropped by two percentage points. While CIMB Thai is not expected to contribute more than what is offered currently (about 7%), we understand that the focus will be on asset quality (hence selective), high-end consumers and corporate entities, which are multinational corporations with presence in Asean.
By the end of Forward23, the Indonesian market will likely contribute further, from about 20% to about 30%, with the home market dropping from 64% to about 50%. Contributions from Singapore and Thailand are expected to remain the same at about 7%.
We have made no changes to our financial year 2019 (FY19)/FY20 earnings estimates of RM4.7 billion/RM4.6 billion based on the following unchanged assumptions: i) a loan growth of about 6%; ii) net interest margin compression at 10 basis points (bps); iii) a credit charge of 45bps; and iv) a return on equity of 9%. Coming from a low base, we have pencilled in a 6% non-interest income growth but expect a 25% contribution to the top line. Our TP is maintained at RM6.25 based on an unchanged target price-to-book value (PBV) of 1.03 times, implying a 0.5 standard deviation level below its five-year mean to reflect the ongoing challenges and prevailing volatility. Valuations are undemanding at 0.9 times PBV, at the bottom of its five-year mean. With the market looking like it is bottoming out, valuations are attractive for the stocks in our banking universe. Besides, we also expect the M&A consolidation narrative to refloat soon, with CIMB being one of the likely consolidators. With a potential return of over 20%, coupled with an attractive dividend yield of 4%, we reiterate our “outperform” call. — Kenanga Research, July 11