AmWatch - Alliance Financial Group : Priced in substantial level of macro slowdown BUY, 20 Aug 2015

STOCK FOCUS OF THE DAY

Alliance Financial Group : Priced in substantial level of macro slowdown BUY

We reiterate BUY on Alliance Financial Group Bhd (AFG) with an unchanged fair value of RM4.30/share. This is based on an unchanged ROE of 11.8% for FY16F, leading to a lower fair P/BV of 1.4x. We have done a sensitivity analysis to determine the various levels of ROE, net earnings and fair value based on different credit costs scenario.  If credit costs is to rise to 70bps – similar to that of the local banking industry during the 2008 external slowdown – AFG’s P/BV may be pegged at 1x. Theoretically, there is potential for AFG’s fair P/BV to trade below P/BV at higher levels of credit costs above 70bps, based on a straightforward application of Gordon Growth valuation methodology.

However, we would argue there may be some short-term support at the book value level, as book value remains intact unless there is a net loss, in which case book value is reduced from the previous year’s level. The cut-off point where net profit may swing to a loss, based on our sensitivity analysis, is when credit costs hit 221bps, and loan loss provision is increased exponentially to RM865.5mil – an unlikely scenario at this stage. Net earnings is then effectively zerorised. Under this scenario, book value is estimated at RM2.83/share.

Given there is a possibility of negative feedback loop being played out due to recent macro trends, we believe a strong support would be at our projected RM2.83 book value for FY16, under a significant slowdown scenario. The other thing to note, in terms of the main difference between now and 2008, in our view, is the company’s new pre-early care and pre-emptive measures to address potential asset quality issues. These include identifying loans which may potentially hit bumpy spots – e.g. due to over-expansion of business operations. We are particularly positive on its pre-emptive pre-early care initiatives, as this essentially provides a much better buffer for full rehabilitation, before cash flows are significantly affected. Despite the prevailing macro uncertainty in the current cycle, we believe the company is executing its profitability strategy well, as well as pre-emptive monitoring of asset quality. At current levels, we believe the risk-reward trade-off for AFG looks highly attractive, as AFG is currently trading at a valuation of only 1.2x.

Others :

KL Kepong : Boost from Synthomer’s dividends BUY

MSM Malaysia : Benefited from lower cost of raw sugar                BUY

AMMB Holdings : Slow 1QFY16 NON-RATED

Economic Update  : Domestic cost pressure pushes inflation above 3.0% in July

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