MBSB raising RM1.47b from rights issue for expansion

by **Cals** Thu 02 Jan 2014, 10:04

Business & Markets 2013

Written by Affin IB Research

Thursday, 02 January 2014 10:01

Malaysia Building Society Bhd
(Dec 31, RM2.21)
Maintain reduce at RM2.25 with a revised target price of RM2.10 (from RM3.80): Our “reduce” rating on MBSB remains unchanged subsequent to our price target adjustment from RM2.80 to RM2.10 (dilution effect of 59 sen; cut in terminal growth rate from 5% to 3% of nine sen).

We factor in the dilution impact from the 1-for-2 renounceable rights issue (RRI) of RM1.47 billion, comprising the issuance of 889.8 million rights shares at RM1.65 (based on a 28.9% discount to the theoretical ex-rights price on the five-day volume weighted average price price up to Dec 9, 2013).

In our view, MBSB’s curent share price remains overvalued relative to our revised price target of RM2.10, which is based on a lower price-to-book value (P/BV) multiple of 1.3 times on revised financial year 2014’s (FY14) return on equity (ROE) of 19%, a lower terminal growth rate of 3% and unchanged cost of equity of 15.3%. (Previous assumptions: Target P/BV multiple of 1.81 times on FY14’s ROE of 23.4% and terminal growth rate of 5%).

Since Bank Negara Malaysia’s macroprudential measures came into effect on July 5, 2013, MBSB had started to exhibit signs of a sharp deceleration in its personal financing (PF-i) portfolio growth, its main income generator (81% of operating income). As at the third quarter (3Q) ended Sept 30 of FY13, the PF-i segment grew by only 2.9% quarter-on-quarter while annualised growth was 41.8% versus its past two years’ annual growth track record of more than 100%. Despite that, MBSB’s operating profit as at 3QFY13 was still profitable, although growth plateaued sequentially while credit costs spiked, impacting profitability.

Notwithstanding management’s counter measures to mitigate the decline in overall group loans growth, a slowdown in future loans growth is inevitable. In our view, investors are better off selling MBSB-OR given the upside of 17%, based on the closing price of MBSB-OR at 54 sen versus MBSB’s ex-right fair value of RM2.10.

The RRI was undertaken in order to expand MBSB’s financing business as a result of the tight liquidity it currently faces (net loan to financing ratio of 93%), offset higher cost of funding within the group, strengthen its capital base and diversify its investments to include liquefiable assets.

Meanwhile, with the additional issuance of shares (51.1% of share capital), our FY14 and FY15 fully-diluted earnings per share forecasts are adjusted downwards to 23.9 sen and 25.2 sen respectively, representing a dilution of 32% and 34%. Our FY14 and FY15 net earnings forecasts are unchanged. — Affin IB Research, Dec 31

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This article first appeared in The Edge Financial Daily, on January 02, 2014.