CIMB Group Holdings Bhd
(March 21, RM5.65)
Maintain buy with a higher fair value (FV) of RM6.30: There are firmer indications of a potential completion of the joint-venture (JV) deal for CIMB Group Holdings Bhd’s (CIMB) stockbroking business with China Galaxy Securities Co Ltd (CGS), which could lead to further cost-savings, improved earnings and conseuently higher return on equity (ROE).

Foreign shareholding of the stock rose to 26.5% as at end-February 2017 from 25.8% in December 2016. This was similar in trend to Malayan Banking Bhd’s foreign shareholding, which increased to 16.6% as at Feb 24, 2017 from 15.8% on Nov 25, 2016. We estimated a net buying of 62 million CIMB shares in February 2017, compared to a net sell-down of 61 million and two million shares in November and December 2016 respectively.

CIMB’s financial year ending Dec 31, 2017 (FY17) and FY18 ROE is projected to improve to 8.9% and 9.9% respectively from 8.2% in FY16. This will be driven by a modest growth in operating income, further decline in cost-to-income (CI) ratio from expense reduction initiatives and lower provisions. Recall, CIMB’s Indonesian arm PT Bank CIMB Niaga Tbk’s provisions are anticipated to gradually improve while that of CIMB Thai Bank PCL will be lower in FY17 than FY16, returning the latter to the black.

The catalyst for further revision to our earnings estimate will be the successful completion of the deal to dispose of 50% of its stockbroking business to CGS. Presently, the group’s stockbroking business in Malaysia is parked under its investment bank. The media reported that it is exploring the option of acquiring another stockbroking licence to operate in Malaysia from Jupiter Securities Sdn Bhd for more than RM50 million. We believe that this will enable it to form a JV with CGS to operate the stockbroking business both in Malaysia and overseas. The group has confirmed that it is in talks with various stakeholders and parties to facilitate the potential partnership with CGS, while Olympia Industries Bhd has affirmed that it plans to dispose of its equity stake in Jupiter Securities.

Should the deal be completed, it is expected to result in an immediate cost reduction of more than RM300 million annually to the group. For now, our CI ratio assumptions of 52.5% and 50.5% for FY17 and FY18 respectively have yet to factor in cost-savings from the deal. We maintain “buy” with a higher FV of RM6.30 per share from RM5.70 per share. We peg the stock with a higher price-to-book value (P/BV) ratio of 1.1 times from one time previously, half a standard deviation below its historical five-year average P/BV of 1.4 times. 

Our call is based on CIMB’s compelling valuation, potentially further improvements in the group’s CI ratio, decent ROE and strong common equity Tier 1 ratio of 11.3%, which is on track in meeting CIMB’s 2018  target of 12%. — AmInvestment Bank, March 21