Affin Holdings Bhd
(Nov 9, RM2.20)
Retain add due to attractive valuation with target price (TP) raised to RM2.96: Management divulged details of its transformation programme, called Affinity, and the targets for 2020, in a roadshow in Kuala Lumpur recently.

We foresee tangible benefits from Affinity, in the form of improvements in the cost-to-income ratio, enhancement of its digital banking capabilities to elevate its competitiveness in this fast-growing segment, and stronger fee income generation. This will help to address its areas of weakness like its sector-high cost-to-income ratio of 60% in 2015, and the relatively small non-interest generation from other divisions of Affin Bank, like treasury, credit cards and wealth management.

The early successes for Affinity have been the spike-up in the pipeline of undisbursed mortgage loans from RM700 million in 2015 to RM3 billion now, and cost savings of RM20 million to RM25 million a year from the outsourcing of certain functions.

Affin Bank has an aggressive target to double its operating income from 2015 to 2020 (or a five-year compound aggregate growth rate [CAGR] of 15%), which is significantly higher than our estimated growth of 43.5% over the same period.

If we apply the targeted 15% CAGR on operating revenue for Affin Holdings, our financial year ending December 31, 2017 (FY17) to FY18 net profit forecasts will be lifted by 34%-59% (assuming constant overheads and credit costs) which will also increase our TP by 80% from RM2.96 to RM5.33.

The management also addressed some market concerns during the meetings — that i) the gross impaired loan ratio would be stable for end-2016 versus 1.9% for end-2015, ii) there would be an uptick of credit costs but with credit sustainable charge-off rate expected to be low at 20 to 25 basis points, and iii) the exposure to the oil and gas sector is small at only 1.5% of its total loans.

Affin remains an “add” given its attractive valuation — FY17 price earnings of 7.5 times and price-to-book value of 0.5 times, significantly lower than the 10.8 times and 1.3 times, respectively, for the sector. We retain our FY16-FY18 earnings per share (EPS) forecasts but raise our two-stage dividend discount model-based TP from RM2.60 to RM2.96 due to the rollover of the TP to end-2017, and the increase in the assumed growth rate for the interim growth phase on the expectation that Affinity will drive earnings. The downside risk is a spike-up in impaired loans. — CIMB Investment Bank Bhd, Nov 9