Trade Wise: Is CIMB a good bargain now?

-A +A

CIMB Group Holdings Bhd’s (fundamental: 1.35; valuation: 2.1) share price has been on a downward trend since October last year, and the stock currently is trading at a price-to-book (P/B) valuation of 1.2 to 1.3 times, which is one of the lowest in the sector. Yet, fund managers and banking analysts say it may not be the right time to get into the counter as the country’s second largest banking group still needs to deliver on its targets and digest its acquisitions of the last few years.    

Investors who have been eyeing CIMB will notice that its shares have been trading at historically low levels in the past few years. In fact, the stock hit a low of RM5.17 last month — its lowest since October 2009. It has since rebounded to close at RM5.69 last Friday. Even so, it has yet to recover to its average levels seen last year and in 2013 of RM6 and RM7 respectively.   

There are a number of reasons why the stock has been battered of late, and these include disappointing results — CIMB has seen year-on-year decline in earnings for the last six quarters since the quarter ended June 30, 2013 — and the expectation that its results will continue to be weak for at least the following two quarters. On top of that, there is also the uncertainty surrounding the banking group following recent management changes.

“Management has disclosed its ambitious T18 strategy, but we need to see strong execution. For example, it closed its Australian business, which demonstrates that it is willing to take some heavy cuts to restore investor confidence. But what would reaffirm conviction for the stock is for the bank to stop acquiring more assets, and consolidating whatever it has in its balance sheet. The healing process will definitely take time,” says Bharat Joshi, head of investments at PT Aberdeen Asset Management, tells The Edge in a telephone interview from Jakarta.

“The franchise is certainly cheap at this level, but it still needs to trim a lot of the fat accumulated over the past decade. The consumer bank engine needs to be reignited while tightening up the CIMB Niaga business because it’s starting to become the Achilles’ heel for the bank. The non-performing loans (NPLs) are coming back to bite them.”

CIMB Niaga’s net profit for its financial year ended Dec 31, 2014, fell 45.3% y-o-y to IDR2.3 trillion (RM646.47 million) on the back of a 188% y-o-y increase in provisions to IDR3.5 trillion. Consolidated gross NPL ratio surged to 3.9% by the end of last year from 2.23% in 2013.

“We are still holding on to CIMB shares but won’t be adding more until we see actual results. We are in it for the long term, but we want to see its execution ability before we start turning optimistic again,” says Bharat.

Banking analysts share his views.

“The stock has come a long way … but there will still be bad news to come. There will be fourth-quarter results that are expected to be very weak,” says a senior banking analyst.

“Moreover, a lot of people are still wondering if it can successfully execute what it plans to do. So far, they have missed their targets. Most investors will want to wait to see how the restructuring and cost-cutting pan out first.

“Also, CIMB’s regional side needs to be cleaned up. The asset quality problems in Indonesia are not that great. Investors should get a better sense of the amount of provisions they have to make and when the NPLs will peak in Indonesia before buying into the regional exposure.”

Six analysts polled by Bloomberg have a “buy” call on the stock, while another six have a “sell” call. A majority of the analysts polled — 14 — have a “hold” recommendation. The 12-month consensus target price for CIMB is RM6.02.

Another banking analyst reckons that investors who are patient and willing to ride out the near-term headwinds that CIMB will be facing could consider picking the stock should it continue to trade at the current low levels. “It also depends on the investor’s risk appetite,” he says.

UOB Kay Hian Research says it believes that the RM5.20 level (1.1 times its forecast FY2015 book value) represents a more attractive entry point as the current 1.2 times P/B may not have fully priced in two quarters (4QFY2014 and 1QFY2015) of weak results, which could drag the group’s return on equity (ROE) to 10% versus the current 11.5% expectation.

“With CIMB expected to report further weakness in 4QFY2014 and 1QFY2015 earnings, coupled with a rather subdued growth outlook guidance for 2015, we see downside risk in earnings expectations and hence, ROE as well. Note that 3QFY2014 ROE of 9.8% was significantly lower than management’s initial 2014 target of 13.5%,” it adds.

The foreign research house has a “hold” call on the stock and a target price of RM6 (1.3 times 2015F P/B and 11.3% ROE).

Banking on alternatives

If one falls into the category of “wait-and-see investors” and does not want to buy into CIMB just yet, what are the alternatives out there?

Public Bank Bhd (fundamental: 2.8; valuation: 1.0) has always been a favourite in the finance sector given its earnings track record, but it does not come cheap, trading at a high premium of 2.55 times P/B — the highest in the sector.

As most banks are battling in a tougher operating landscape, the third largest banking group in the country recently announced another strong set of results.

For its FY2014 ended Dec 31, 2014, Public Bank posted an 11.17% increase in net profit to RM4.52 billion compared with a year ago. Commenting on the FY2014 financial results over a week ago, founder and chairman Tan Sri Teh Hong Piow said the group persevered and continued to perform well, recording a strong annual loan growth of 10.8%, outpacing the banking system’s 8.7%.

“Public Bank is expensive. But if investors are willing to pay the premium for its earnings predictability, it is a good choice,” says another banking analyst.

“But there are others like Hong Leong Bank Bhd (fundamental: 2.8; valuation: 2.2) and RHB Capital Bhd (fundamental: 1.5; valuation: 2.1) which may provide a cheaper entry [into the sector] and still bring steady earnings. But bear in mind that they will not be able to give them the regional reach that CIMB can.”

RHB Capital is trading at 1.14 times P/B and Hong Leong, 1.7 times.

“The two domestic banks — Hong Leong Bank and Public Bank — which didn’t jump on the regional acquisition bandwagon have remained quite sturdy. I wouldn’t say going regional is a bad thing, but one always has to be careful, especially in newer markets where one lacks local knowledge or experience. There has to be a gradual and sustainable expansion strategy in any market one goes into,” says Bharat.

Industry observers also point out that Malayan Banking Bhd (fundamental: 1.5; valuation: 1.3) will be able to provide the regional reach investors are looking for. It is trading at 1.68 times P/B.

“Maybank is an option, but it is comparatively not as cheap as CIMB now. I guess there is a price for everything,” says a local banking analyst with a bank-backed research house.

tw_cimb-chart_1054

tw_pb-chart_1054


Note: The Edge Research’s fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations. Visit www.theedgemarkets.com for more details on a company’s financial dashboard.

This article first appeared in The Edge Malaysia Weekly, on February 16 - 22, 2015.