MBSB may see lower ROE, valuations post merger

PETALING JAYA: Kenanga Research cautioned that the proposed merger between Malaysia Building Society Bhd (MBSB) and Asian Finance Bank Bhd (AFB) might result in lower return on equity (ROE) and correspondingly lower valuations for the MBSB group.
Hence the research house said it is less positive on the deal, despite MBSB being on track to create the second largest Islamic banking entity.
MBSB’s acquisition of AFB for RM644.95 million will be satisfied via a combination of RM396.89 million cash and the issuance of 225.51 million new MBSB shares at an issue price of RM1.10 per share.
Kenanga Research also pointed out that the valuation of 1.3 times price-to-book value ratio (PBV) seems to be steep for a small banking entity with the industry average trading at 1.4 times. However, it said the merger will create the second largest listed Islamic banking entity after BIMB and is cheaper than BIMB’s PBV of 1.8 times.
It said as MBSB’s forward shareholders’ funds are expected to be higher by RM197 million from RM6.724 billion to RM6.922 billion based on the proforma accounts, its ROE for FY18 is estimated to be slightly lower by 21 basis points to 8.26%.
Based on the illustrative numbers provided, Kenanga Research views the proposed development as neutral, as earnings are unlikely to be significantly accretive in the short- to medium-term. Pending final approval, it is maintaining an “outperform” call on MBSB with a target price of RM1.45.
MIDF Research, however, opined that the valuation of the merger is fair, premised on valuation of previous financial sector mergers of about 1.4 times PBV.
MIDF Research, which is maintaining a “buy” call on MBSB with a target price of RM1.50, said the proposed exercise will result in the acquisition of AFB’s deposit taking license and the full bank license will allow MBSB to tap into financial services, which it could not offer, such as trade facilities, CASA deposits and interbank instrument.
In terms of the new share issuance, MIDF Research said the dilutive effect will be minimal and can be compensated by the increase in its future value.
It said the future looks rosy for MBSB given the encouraging progression of Islamic finance in the region. MBSB is expected to obtain its full Islamic status in two to three years pending completion of the transfer consideration.