CIMB maintains outperform call on Affin

Written by Financial Daily
Wednesday, 04 November 2009 11:02

CIMB Research has maintained its outperform call on AFFIN HOLDINGS BHD [], viewing the bank’s aggressive return on equity (ROE) target of 20% and lower non-performing loans (NPL) ratio positively.

“In FY08, Affin Holdings recorded an ROE of 6.8%, which is projected to improve to 9% in FY11. Assuming Affin Holdings and Affin Bank have similar ROE (targets), the group would record a net profit of RM1 billion in FY11, 122.2% higher than our forecast, if it manages to hit an ROE target of 20%,” it said in a research note yesterday.

CIMB Research set its dividend discount model-based (DDM) target price for Affin Bank at RM2.59 based on 7.9 times FY10 price earnings (PE).

“The DDM parameters remain unchanged, including a cost of equity of 14.7% and dividend growth rates of 17% for the interim phase and 6% for the long-term growth phase,” it said.

CIMB Research said it was also encouraged by re-rating catalysts of better-than-expected asset quality, robust loan growth and margin expansion.

“We consider the ROE target to be challenging as it implies a net profit compound annual growth rate (CAGR) of 87.6% in the next two years,” it said, adding that it viewed the target as a stretch goal.

“To achieve this, we believe the group would have to chalk up more than 20% growth in loans and non-interest income while further reducing its credit costs.”

Should Affin Holdings succeed in achieving this target, it would be a big bonus to investors and the research house would have to raise its forecasts by 59%-122% and its target price from RM2.59 to RM5.50.

CIMB Research added that it was also encouraged by improvements in Affin’s financial performance in the last two to three quarters which was attributed to benefits from a revamp of the group’s operations.

“Affin Bank has set a five-year target to reach the levels of its biggest peers in terms of profitability and efficiency,” said the research house, adding that the bank’s CEO Zulkiflee Abbas Abdul Hamid had said the bank aimed to be among the top five lenders in key ratios like ROE, cost-to-income ratio and NPL ratio rather than asset size.

Yesterday, Affin Holdings closed at RM2.05, up four sen.


This article appeared in The Edge Financial Daily, November 4, 2009.