Non-bank financial institutions a good buy

RHB Research notes that both Allianz and Syarikat Takaful Malaysia Keluarga are trading below their respective five-year averages.

PETALING JAYA: Healthy earnings prospects and inexpensive valuations have made the non-bank financial institutions (NBFIs) segment more appealing, with a research house advising investors that it is a “good time to accumulate”.

In particular, insurers are the top picks of RHB Research, who said that both insurers under its coverage are backed by solid fundamentals and attractive valuations.

Bullish on the NBFI sector, RHB Research has a “buy” call on Allianz Malaysia Bhd and Syarikat Takaful Malaysia Keluarga Bhd (STMB).

“Both insurers under our coverage achieved double-digit bottomline growth year-on-year in their maiden sets of Malaysia Financial Reporting Standards 17 (MFRS17) results on a combination of greater insurance or takaful revenue and investment income.

“A normalised effective tax rate should also benefit both insurers’ bottom lines,” the research house said in a market strategy report.

RHB Research pointed out that both Allianz and STMB are trading below their respective five-year averages.

“We believe this presents an attractive opportunity to accumulate, given that both insurers still have sound fundamentals.

“Top line growth is expected to be sustained at mid-to-high single digits following a record-breaking financial year of 2022 (FY22), while effective expenses management and improving investment income should mitigate the negative impact of higher claims,” it said.

Last month, UOB Kay Hian (UOBKH) Research also maintained its bullish stance on STMB, although it slightly lowered the target price after factoring in the various impacts of MFRS17.

It said STMB’s results in the first quarter of FY23 (1Q23) was broadly in line with its forecast, representing 24% of its full-year forecast.

The insurer’s earnings in 1Q23 rose 22.8% year-on-year, largely attributed to higher net investment income.

“The higher investment income came on the back of higher interest income from its securities portfolio as interest rates rose.

“However, this was partially offset by lower takaful service results and claims liabilities rising due to higher discount rates applied given the rise in interest rates,” according to UOBKH Research.

Beyond the insurers, RHB Research also sees value in non-bank lenders.

RHB Research said guidance from the management teams of the non-bank lenders point towards more moderate controlled growth in FY24.

It added that Elk-Desa Resources Bhd and AEON Credit Service (M) Bhd are targeting high single-digit and low double-digit financing growth, respectively.

Meanwhile, RCE Capital Bhd aims to track the growth of the wider banking industry, namely in the mid-single digits.

“Non-performing loans are expected to rise from inflationary pressures affecting borrowers’ repayment capacities, but the situation should remain manageable.

“Credit costs should also stabilise back to pre-pandemic levels – against credit costs in the fourth quarter of 2022, the number should inch slightly higher for AEON Credit and ELK, and stay more or less flat for RCE – providing further visibility on bottomline prospects,” it said.

Among the three non-bank lenders, Aeon Credit is RHB Research’s preferred pick, considering that the company’s receivables growth remains robust, with asset quality being manageable. Its valuation is also bashed down.

“This presents an opportunity to buy on weakness. We also commend AEON Credit’s recent efforts at tightening its financing criteria to better safeguard asset quality.

“We are neutral on RCE and ELK for now, as their lofty valuations lead us to believe the market has already priced in the defensive attributes of both counters namely, earnings stability (mainly for RCE) and yields,” according to the research house.

In a separate note, Kenanga Research also reaffirmed its “outperform” call on AEON Credit, with a target price of RM16.15 per share.

“Against conventional banking institutions, AEON Credit commands a leading return on equity of over 15% albeit with more modest dividend yields of 5%.

“We continue to expect sentiment for the stock to improve with subsequent updates as it is a proxy to stronger gross domestic product output while its Islamic digital banking licence extends new value propositions to customers,” the research house said.

Commenting on AEON Credit’s recent proposal to undertake a one-for-one bonus issue, Kenanga Research described the quantum of bonus issue as “the most generous” since 2012.

“We are overall positive as it adds liquidity to the stock and would make market participation more accessible.

“Fundamentals remain unchanged,” it said.

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