Kenanga neutral on Affin corporate exercise

PETALING JAYA: Affin Holdings Bhd’s corporate exercise that would ultimately lead to its wholly-owned subsidiary Affin Bank Bhd assuming the listing status of Affin Holdings could result in a slightly higher return on equity (ROE) and correspondingly higher valuations for the group.
Kenanga Research said the reorganisation is not expected to have any material effect on the earnings of Affin for the financial year ending Dec 31, 2017. Affin Bank’s forward shareholders’ funds are expected to be lower by RM469 million (from Affin’s RM8.87 billion) to RM8.40 billion based on the proforma accounts.
“Hence, FY17 shareholders’ funds for the new entity are now expected to be slightly lower, thus, our estimated FY17 ROE is expected to be improved by a marginal 15bps to 5.54%. The improved ROE would warrant a higher price-to-book valuation for the new entity,” the research house said in a report. However, Kenanga Research is somewhat neutral on this corporate exercise.
“As details are yet to be firmed up, we refrained from jumping the gun in terms of our recommendation on Affin. Based on the illustrative number provided, we view the proposed development as neutral. However, as we feel that group’s asset quality will still be challenging in the still prevailing volatile environment, we maintain our ‘underperform’ recommendation on Affin, for now, with an unchanged target price of RM2.20,” said Kenanga.
Meanwhile AllianceDBS Research noted that Affin Bank issued a RM1 billion subordinated medium-term notes (MTN), as part of its RM6 billion MTN programme, and suspects that this instrument could be used to facilitate the internal reorganisation.
“While we view this exercise as mildly positive for the group, we maintain our fully valued call on Affin Holdings, as we have yet to see visible improvement on its asset quality indicators (absolute impaired loans increased 7% year-to-date, loan loss coverage is at its lowest level since 2010). In this current uncertain environment, we continue to favour banks with more steady and conservative asset-quality indicators,” said AllianceDBS.
It made no adjustment to the earnings and maintained its fully valued call on Affin with a RM2.00 target price. Affin Holdings is targeting to release its full-year results on Feb 28.