ANALYST REPORTS Affin Holdings Bhd By TA Securities Buy (initiating coverage) Target price: RM4.40
AFFIN Bank is the seventh largest anchor bank in the country with an asset size of RM56.6mil and is supported by 97 bank branches in the country. The largest pre-tax profit contributor to Affin Holdings Bhd (AHB) in the financial year ended Dec 31, 2011 (FY11) was commercial banking and hire purchase via Affin Bank followed by its investment banking activities.
Given the bank's small size, we believe it would be challenging for the group to compete with its larger peers.
Despite that, the group's operation matrices are improving, thanks to an intensive transformation programme, which it undertook in 2005 to strengthen its balance sheet and address its massive non-performing loans problem.
To date, the bank has successfully brought down its impaired loans ratio to 2.5%, which is closer to the industry's 2.1%.
Management also took the initiative to re-focus on its customer base and deepen its relationships with higher rating customers, strengthen its foothold in the retail business as well as enhance the bank's profile by introducing an extensive range of products and services through its network of subsidiaries and associates.
In FY12 through to FY14, we assume its loans growth to increase by a steady average pace of 12.5%. We are also projecting stronger average deposit growth of 16% over the next three financial years. We envisage net interest margin to ease by around 20 basis points (bps) year-on-year before narrowing by another 10 bps in FY13 and FY14.
Also expected is a modest 10% year-on-year improvement in non-net interest income (non-NII) and we forecast average non-NII to total income ratio of around 25% over the next three financial years. We expect net non-performing loan ratio to improve to between 1.8% and 2.0% in FY12 to FY14.
Based on the current share price, we opine that AHB's valuations are attractive based on forward price to book value (PBV) of 0.9 times in comparison with the peer's average of around 1.8 times. We value AHB at RM4.40, which translates to an implied PBV of 1.2 times.
Despite the deep discount compared with the industry's average, we believe it is reasonable due to AHB's smallish operations, dwindling loans market share coupled with average return of equity of around 10.3% versus industry's 15%-16%.
Nevertheless, we are initiating coverage on AHB with a “buy” recommendation premised on the potential total upside of 25.6% from the stock's last closing price. We also note that the stock is trading below the mean of its 10-year PBV valuation cycle.
Top Glove Corp Bhd By RHB Research Institute Trading buy Fair value: RM5.71
TOP Glove announced that it had entered into a conditional sale and purchase agreement to acquire the entire stake in GMP Medicare for a cash consideration of RM24.1mil. The acquisition will be financed via internally-generated funds.
GMP currently owns and operates a factory, which produces latex gloves (i.e. powder-free, surgical and dental gloves).
The factory is situated on 16.7 acres in Lukut, Negri Sembilan.
We understand that the factory has a 11 production lines with a production capacity of 500 million pieces per annum.
The purchase consideration was agreed upon based on a fair market value.
We are positive on the acquisition as it is in line with the group's expansion plan of increasing its global market share to 30% from 25% currently, over the next three years. In addition, while Top Glove's overall utilisation rates are currently at 70%, we understand that production of powder-free gloves is already running at optimum utilisation rates.
Thus, despite the small size of the acquisition, it is still a quicker way to expand capacity for powder-free gloves.
We also note that the six-month timeline to the completion of the deal is shorter compared with the one to one-and-a-half years required to commission a factory.
While the additional capacity arising from the acquisition is relatively small, we note that there is still an additional eight acres of vacant land on the site, which can be used for further capacity expansion.
The key risk, in our view, is if the acquisition fails to go through.
We raised our financial year ending Aug 31, 2013 (FY13) to FY14 earnings slightly by 1.3% per annum after we factor in the additional capacity arising from GMP.
Our fair value is thus raised to RM5.71 (from RM5.64) based on unchanged target calendar year 2013 price to earnings ration of 15.5 times.
We believe the recent weakness in latex prices and strengthening in US dollar/ringgit rate suggests greater impetus for the company's acquisition.
Fitters Diversified By HwangDBS Vickers Research Buy (maintain) Target price: 78 sen
FITTERS has entered into a 30:70 joint venture (JV) agreement with Tradewinds Plantation to undertake and carry out the construction and operation of a dry long fibre plant at Sungai Kachur Oil Palm Estate in Johor.
We understand that the construction of the fibre plant is worth RM7mil and an additional biogas plant at the mill may be in the pipeline. There is also a five-year offtake agreement between Fitters and Tradewinds where Fitters will purchase the dry long fibre output from the plant.
The JV does not come as a surprise as we had mentioned before that Fitters was in advanced stages to secure several green mill contracts. The announcement is also in line with Fitters' business model to co-own the fibre plant to underpin its recurring income base from the additional profit from offtake agreements as well as trading profit from the supply of dry long fibres.
We estimate that the deal could contribute up to RM1.5mil net profit annually.
We maintain our “buy” call. We revised down financial year ending Dec 31, 2012 (FY12), FY13 and FY14 forecast earnings by 11%, 4%, 4% respectively, mainly to account for the slight delays in green mill contracts wins, which affect its future recurring income base.
Accordingly, our sum-of-parts derived target price is nudged down to RM1.15. Nevertheless, we expect Fitters to secure more green mill projects going forward given the strong value proposition of additional income from palm oil waste. Its innovative business model and first-mover advantage could help the company to tap into the huge potential in the palm oil-related renewable energy market.
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