Public Bank hits a fresh record high of RM21.30
KUALA LUMPUR: UOB Kay Hian Malaysia Research has upgraded Public Bank to Buy with a higher target price of RM25.20 as it upgraded the earnings outlook.
It said on Friday the RM25.50 target price was at 2.45 times 2018F price-to-book value, 14.7% returns on equity, post earnings upgrade.
The research house expects the banking group to be a prime beneficiary of the new government’s policies in raising disposable income and private sector growth in the longer term given its consumer and SME-centric loans base.
“Current valuations have also declined to -one standard deviation below its long-term mean price-to-earnings (PE) while greater earnings resilience amid the current uncertainty should warrant a larger valuation premium gap to peers,” it said.
UOB Kay Hian Research said Public Bank’s share price has declined 7.1% since it downgraded the stock to a Hold in late-March 2018 on valuation grounds and 12.5% from its recent peak.
“Although foreign shareholding remained high at 39.0% as at end-May 18 vs the all-time high of 39.4%, we believe that stability in share price will eventually be anchored by the group’s more resilient earnings outlook in light of the new Pakatan Harapan (PH) government’s fiscal spending cutback.
“Public Bank’s construction and government related loans constitute 2% and 0.4% of its total loans base respectively vs sector average of 4% and 2% respectively. This would also place the group
in a better position to contain any potential lumpy NPL risk emanating from the review/cancellation of various infrastructure projects,” it said.
UOB Kay Hian Research said the group’s loans composition, which is heavily skewed to the consumer and SME segments (86% of domestic loans books), should benefit from the PH government’s mandate to raise the disposable income of the masses and have the private sector as a key economic growth engine.
This may help to fuel stronger consumer and SME loans growth.
“We believe that auto loans (15.6% of Public Bank’s loans base vs industry’s 10.0%) and SME loans within the wholesale and retail trade segments (8.4% of Public Bank’s loans base vs industry’s 7.2%) could experience a more immediate uplift in growth on the back of the expected improvement in consumer purchasing power and confidence emanating from PH’s mandate to raise disposable income.
“Share price has displayed resilience in times of uncertainties. Public Bank's foreign shareholding rose despite the oil price and currency challenges that Malaysia faced in 2015-16 as its defensive qualities were well reflected in the group’s 12.5%/2.5% earnings growth vs sector’s earnings contraction of -2.5%/-0.8%.
“As such, there was an inverse relationship observed between its share price performance and slight decline in ROE as investors had flocked to Public Bank in times of uncertainties,” said the research house.
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