Wednesday, April 6, 2011

MBSB ... Apr11

Mercury Securities Sdn Bhd

BACKGROUND
Malaysia Building Society Berhad (MBSB) originally started off as Federal and Colonial Building Society Limited that was incorporated in 1950. Later on in 1956, it changed its name to Malaya Borneo Building Society Limited (MBBS), with the Malaysian Government as its major shareholder. MBBS was listed on the Stock Exchange of Malaysia and Singapore in August 1963.

MBSB was incorporated in Malaysia under the Companies Act, 1965 in March 1970, before it was listed on the Kuala Lumpur Stock Exchange in March 1972. The Employees Provident Fund Board (EPF) and Permodalan Nasional Berhad (PNB) are now the major shareholders of MBSB. MBSB offers a range of innovative products and services through its branch network located all over Malaysia including Sabah and Sarawak.

“Special status”
MBSB is a Scheduled Institution as defined under the Banking and Financial Institution Act 1989 (BAFIA). The status of an Exempt Finance Company was granted to MBSB in March 1972 by the Ministry of Finance (MOF) and the status has remained since then. This allows MBSB to carry on a finance business without a license.

“Allowed to take deposits”
Just like a bank, MBSB is also able to take deposits from the public. MBSB allows people to open Savings Accounts and Fixed Deposit (FD) Accounts (but not Current Accounts) at its branches. Individuals and corporate bodies are encouraged to place deposits. Senior citizens are also able to get preferential interest rates. MBSB also offers Islamic Fixed Deposit Accounts and Islamic Savings Accounts.

Personal Financing-i (PF-i)
MBSB also offers conventional and Islamic personal financing for individuals. This business segment has been growing quite rapidly during the group’s FY10. In particular, MBSB targets certain market segments such as PDRM staffs, Ministry of Health staffs, EPF staffs, teachers/school staffs and staffs of other government departments/ministries.

Property Financing
Historically, MBSB’s name and loan portfolio is more synonymous with property financing. MBSB provides financing for both residential and commercial properties. The group offers financing up to 105% (including MRTA) for residential properties and up to 80% for commercial properties. As property financing is a form of collateralized lending, MBSB holds a sizeable amount of properties as collateral. The new, high net worth clientele mortgage venture, MBSB Ultimate (for properties costing RM500,000 and above), was also launched during the year.

Corporate Loan
For the Corporate Loan business segment, MBSB offers Commercial Financing, Project Financing, Contract Financing and Musharakah Business. Commercial financing is offered for the phases of under-construction, completed or refinancing of commercial properties. Project financing is typically offered to property developers. Contract financing is normally taken to serve a specific business undertaking or project – e.g. government or oil and gas service contracts. Musharakah business refers to financing for “business partnerships”.

New - Credit Card and Hire Purchase
For this rather new business segment, MBSB partners Bank Islam in offering the “MBSB-Bank Islam Credit Card” Mastercard. This credit card is based on Shariah principles. With this credit card, clients can access Bank Islam’s nationwide network of ATMs (automated teller machines). MBSB is also in the midst of preparing to launch its Hire Purchase financing business segment to the public.

New - Bancassurance
Just like conventional commercial banks, MBSB also offers Bancassurance products. Its products include life insurance, education savings plan, P.A. (personal accident) insurance, home contents cover, motor insurance and MRTT (mortgage reducing term takaful). For this business segment, MBSB’s strategic partners are MNI (a subsidiary of PNB) and Takaful Ikhlas (a subsidiary of MNRB). MNRB is owned by Amanah Raya Nominee S/B and PNB.

Will Writing
MBSB has ventured into the legacy management business of will writing, custodianship and execution. This venture is via its partnership with Amanah Raya Bhd whereby MBSB serves as its agent.

Other Non-Core Businesses
We note that MBSB also derives revenue from the non-core businesses of Property Development and Hotel Operations.

“Distinguished management”
MBSB’s group management is led by its Chairman Tan Sri Abdul Halim bin Ali and its CEO Dato’ Ahmad Zaini bin Othman. Tan Sri Abdul Halim previously served in the Ministry of Foreign Affairs, was formerly the Chief Secretary of the Government (i.e. head of the civil service) and also a former Chairman of the EPF (Employees Provident Fund). Dato’ Ahmad Zaini on the other hand, has vast experience in investment banking, corporate banking and Islamic banking prior to joining MBSB. As is well known, MBSB is a GLC (government linked company), majority owned by the EPF.


OUTLOOK/CORP. UPDATES
In tandem with the improving domestic economy (in GDP terms), we expect that the group’s financing revenues would grow as well. It is common for consumers to take up loans or financing, especially for housing, motor vehicles, credit cards or personal financing. MBSB’s management is targeting strong demand from the public sector, i.e. the civil servants working for the government.

“Economy growing steadily”
The latest available Malaysian economic data (January 2011) revealed reasonably positive growth rates in y-o-y percentage terms, for instance: IPI (+1.0 y-o-y), Manufacturing Sales (+7.7% y-o-y), Exports (+3.0% y-o-y) and Imports (+13.5% y-o-y).

Malaysia had also reported a very respectable 4Q/2010 GDP growth of +4.8% (+7.2% for full year 2010 GDP), stable 4Q/2010 unemployment rate of 3.2% and manageable CPI of 2.9% (February 2011). Meanwhile, Bank Negara Malaysia (BNM) had last reaffirmed its accommodative overnight policy rate (OPR) of 2.75% on 11th March 2011. BNM may decide to increase its OPR during the year to contain inflationary pressures.

The expected growth of the wholesale and retail trade, ICT, tourism, health, education, business services as well as finance and insurance sub-sectors, following the roll-out of programmes and initiatives under the 7 services-related National Key Economic Areas in 2011 augur well for MBSB’s business prospects.

“Better results due to Turnaround Plan”
MBSB’s Turnaround Plan during years 2009-2010 have resulted in a much improved overall group performance. Its plan includes efforts to expand its range of products, better customer service and setting-up a Project Management & Monitoring Department and a Early Care Unit.
In the push for greater operational efficiencies, MBSB has performed several outsourcing exercises which have resulted in benefits such as reduced turnaround time, improvements in cost controls and also levels of customer service. Internal divisions have also been streamlined to reinforce a new organisational structure whereby the sales divisions of retail products have been consolidated into one division. It is expected that the combined marketing efforts will result in better sales and assist the development and introduction of new financial products.

VALUATION/CONCLUSION
As part of its capital management plan, MBSB had proposed a renounceable rights issue of up to 507.1 million new ordinary shares of RM1.00 each at an issue price of RM1.00 for each rights share on the basis of 5 rights shares for every 7 existing MBSB shares held as at an entitlement date to be determined later.
The proposed rights come together with up to 507.1 million free detachable warrants on the basis of 1 warrant for every 1 rights share subscribed. MBSB also proposed to raise its authorised share capital from RM1.8 billion to RM2.8 billion comprising 2.8 billion MBSB shares by the creation of one billion new MBSB shares.

MBSB’s management had proposed a first and final gross dividend per share (DPS) of 9 sen less tax for its FY10 ended 31st December 2010, which has just been approved by shareholders’ at its recent AGM. Based on the issued and paid up share capital as at 31st December 2010, MBSB would pay out RM47.3 million in dividends. This would account for a reasonable FY10 gross dividend yield of 3.9% and dividend payout ratio of 32.4% of its annual net earnings.

“Reasonable dividend proposed”
With a relatively high adjusted beta (correlation factor) of 1.62 to the KLCI, MBSB has outperformed the KLCI’s performance this year (by +53.7% vs. +1.98% year-to-date (YTD)). Market conditions have also been volatile lately, impacted by the recent political uprisings in the Middle East/North Africa and major earthquake in Japan. MBSB’s stock price recently surged, and this could be attributed to factors such as its positive FY10 results and dividend announcement.

“Buy Call”
Based on our forecast of MBSB’s FY11 EPS and an estimated P/E of 10 times (within its historical range), we set a FY11-end Target Price (TP) of RM3.05. This TP offers investors a 33.3% upside from MBSB’s current market price. Our TP for MBSB reflects a P/BV of 3.2 times over its FY11F BV/share. Meanwhile, the local banking sector’s average P/E and P/BV is 11.7 times and 2.1 times, respectively.

“P/E valuations getting attractive”
MBSB’s strong FY10 results have pleasantly surprised the market. If the group sustains its strong business performance in its FY11, we would deem MBSB’s P/E valuation quite attractive indeed. The group’s ROEs of above 30% are quite admirable. Meanwhile, the group has been in a net cash position since its FY09 (excluding customer deposits as borrowings).

“Concerns and risk factors”
MBSB’s high loan impairment ratio (due to legacy accounts) has been dwindled down in recent years, and we are not overly concerned about it at the moment. Besides, most of the impaired property loans are backed by collateral. The group also has a higher than banking industry average loan-deposit ratio of more than 100%, but MBSB’s management is targeting to bring this down to a more palatable 95-98% level. We are nevertheless comfortable with MBSB’s current level of loans growth, deposits growth, Cost/Income ratio and Net Interest Margin.

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