Brokers Digest: Local Equities - Banking sector, Axiata Group Bhd, Malakoff Corp Bhd, CIMB Group Holdings Bhd

Brokers Digest: Local Equities - Banking sector, Axiata Group Bhd, Malakoff Corp Bhd, CIMB Group Holdings Bhd

Banking sector

CGS-CIMB RESEARCH (APRIL 18): In its 2H21 Financial Stability Review, Bank Negara Malaysia highlighted the risk to the commercial real estate sector caused by the oversupply of commercial properties. We concur with the central bank’s view that the risk from non-residential mortgages (NRM) to banks is low, for the following reasons: (i) NRM only accounted for 12.1% of the banking industry’s total loans at end-December 2021; (ii) the gross impaired loan (GIL) ratio of NRM was low at only 1.46% at end-December 2021 versus 1.44% for the industry’s total loans; and (iii) a sizeable 40.3% of NRM was for the financing of shophouses, which carries lower credit risks, in our view.

The banking industry’s NRM posted a five-year CAGR of only 2.1% from 2016 to 2021, less than half of the five-year CAGR of 4.7% for the industry’s total loans over the same period. This caused the proportion of NRM (over total loans) to decline from 13.7% at the end of December 2016 to 12.1% as at end-December 2021. Going forward, we expect the proportion of NRM to continue to contract as we do not foresee any strong recovery in the growth of NRM compared with the momentum in the past five years.

Among the six Malaysian banks under our coverage (excluding AMMB Holdings Bhd and Bank Islam Malaysia Bhd), Public Bank Bhd has the largest exposure to NRM, which accounted for 22.8% of its total loans in FY21 while Malayan Banking Bhd’s (Maybank) 7.1% was the lowest. However, Public Bank’s NRM GIL ratio was the lowest at 0.2% in FY21 while NRM GIL was 4% for Affin Bank Bhd. In terms of growth, the five-year CAGR in NRM (from FY16 to FY21) was the fastest at 5.2% for RHB Bank Bhd, while Maybank’s NRM contracted by a five-year CAGR of 1.2% from FY16 to FY21.

We expect the banks’ GIL ratio to rise from 1.44% in December 2021 to 1.8%-2% in December 2022 as these banks unwind the repayment assistance for their borrowers. The increase would mostly come from those individual and SME borrowers whose financial positions have been severely impaired by the Covid-19 outbreak. We retain our “overweight” call on banks while our top picks for the sector are Hong Leong Bank Bhd, RHB Bank and Public Bank.
Axiata Group Bhd

Target price: RM4.30 NEUTRAL

PUBLICINVEST RESEARCH (APRIL 20): PLDT Inc, the biggest telecommunications and digital services provider in the Philippines, has announced that it is disposing of half of its telecommunication towers to Axiata’s edotco Group Sdn Bhd and EdgePoint Infrastructure for 77 billion pesos (RM6.28 billion). We see growth potential of the Philippines’ telco sector given the rapid growth in demand for connecti­vity, while the acquisition cost seems fair at about US$250,000 (RM1.07 million) per tower. PLDT is expected to lease back the towers for seven billion pesos a year over a 10-year period.

In the immediate term, we are concerned over the potential investment risk in Sri Lanka as the country is currently facing an economic crisis. Axiata holds an 82.74% stake in Dialog Axiata PLC.

The Philippines’ telco sector is lagging behind its Southeast Asian peers in terms of tower density, resulting in a pressing need to expand and upgrade existing infrastructure to improve on quality and coverage. In May 2020, the government published its first guidelines for independent cell tower construction to speed up the rollout of mobile networks. The country currently has only 22,405 towers. By 2025, mobile and broadband subscribers in the Philippines are projected to reach 159 million and 10.8 million (source: International Trade Administration, USA).
Malakoff Corp Bhd

Target price: RM1.05 BUY

UOB KAY HIAN (APRIL 20): We gathered from a recent meeting that Malakoff’s wholly-owned Alam Flora Sdn Bhd will continue to perform well in 2022. Key earning drivers are: (i) a higher waste collection with the reopening of economic activities; (ii) opex efficiency; and (iii) an expansion of its non-concession businesses including the industrial collection of solid waste, integrated facilities management, public cleansing and the management of landfills. The non-concession business accounts for 10% to 15% of Alam Flora’s top line and experienced double-digit growth in the past two years, albeit from a low base.

Alam Flora accounts for 35% of Malakoff’s 2021 core net profit. To recap, Alam Flora’s performance has exceeded management’s guidance with 2021 core net profit growing 75% y-o-y to RM113 million versus our expectation of sustainable net profit of RM70 million to RM80 million annually.

We expect the strong performance of Alam Flora and moderately higher gas usage of Malakoff’s power plants (since 4Q21, there is higher offtake from gas-fired power plants due to high coal prices) to help offset y-o-y weak Tanjung Bin Energy earnings. This is due to a significant reduction in Tanjung Bin Energy’s availability factor (37% in 4Q21 versus 100% in 3Q21) resulting from turbine blade damage.
CIMB Group Holdings Bhd

Target price: RM5.65 OUTPERFORM

KENANGA RESEARCH (APRIL 20): We attended CIMB’s pre-1QFY22 results briefing which left us with a hint of caution. Though we are comforted by improving repayment assistance mixes, the bank faces possibly higher provisions amid the ongoing double crediting issue and industry-specific headwinds. That said, we believe these could just be near-term pitfalls with the current share price weakness presenting buying opportunities.

Management guided that as at March 2022, group-level restructuring and rescheduling accounts made up 9% of total loans (from 18% in January 2022). The main improvements came from Malaysian accounts, which we suspect were inflated by a high top 20% household income (T20) proportion owing to the eligibility allowed by the PEMULIH (National People’s Well-Being and Economic Recovery Package) programme. CIMB’s management also cited SMEs regaining financial health. Delinquencies stand at less than 1%, which management continues to eye cautiously, but we believe is at highly manageable levels.

Going forward, management anticipates group-wide loans growth in FY22, likely leveraging the reopening of borders and ensuing economic recovery. At the moment, the ongoing Russia-Ukraine conflict should not impede the group’s loans growth target for FY22 (5% to 6%).

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