MALAYSIA Building Society Bhd’s (MBSB) planned merger with two banking groups may not have worked out, but things are starting to look up for the non-bank lender. Its share price is starting to rebound following an initial decline after news of the aborted merger first emerged in mid-January.

The company recently proposed a five-year business plan (2015 to 2019) with several interesting moves to propel its growth in a tough operating environment. MBSB CEO Datuk Ahmad Zaini Othman tells The Edge that there are plans for the company to embark on a merger and acquisition exercise as it aspires to become an Islamic financial institution. It also aims to keep its cost-to-income ratio under 23% for the next five years. One of the ways it plans to cut cost is by trimming its 1,300-odd workforce by about a tenth.

Since its low of RM2.06 on Jan 13, the counter had rebounded 6.8% to close at RM2.20 last Wednesday. Analysts covering the stock have their target prices in the range of RM1.88 to RM2.75, implying an upside potential of as much as 25%.

A cheaper entry point for investors would be through the company’s warrant, MBSB-WA. The warrant was issued by MBSB as part of a rights issue in 2011 on the basis of one free warrant for every one rights share subscribed for.

MBSB-WA, which expires on May 31, 2016, has a strike price of RM1 and a one-to-one conversion ratio. Given the warrant’s closing price of RM1.20 last Wednesday, it is trading on par with its mother share.

MBSB is seen to have an advantage in its personal financing business, which forms a large portion of its loan portfolio, compared with its rivals. The company’s Angkasa BPA and Accountant-General codes allow it to deduct monthly loan instalment payments directly from the salaries of civil servants whom it lends to.

It also adopted more stringent provisioning standards beginning 2014, conforming to the industry’s standard of non-performing loan classification of three months in arrears from six months previously. According to RHB Research, this could mean credit cost may be elevated going forward.

For the financial year ended Dec 31, 2014, MBSB posted a net profit of RM1.02 billion compared with RM597.56 million a year ago. The profit was propped up by the recognition of RM366.06 million in deferred tax assets.

AmResearch, however, says even without the tax write-back, the company’s net earnings were still 12.6% above what it estimated.

“MBSB’s net earnings proved to be resilient in FY2014, despite the softer personal loan industry. Asset quality also continued to record steady sequential improvement,” the research house notes in a report.

This article first appeared in The Edge Malaysia Weekly, on March 2-8, 2015.

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