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MBSB in a different league now

Malaysia Building Society Bhd (July 13, RM1.39)
Initiating overage at RM1.38 with buy rating and fair value of RM2.35:
As an exempt finance company, MBSB is allowed to undertake the financing business in the absence of a banking licence. Under the leadership of CEO Datuk Ahmad Zaini Othman, the company has since 2009 undertaken major reform. From being a traditional mortgage lender, MBSB has moved to a more dynamic platform offering more products, including retail and corporate loans.

The company has carved a niche in the provision of personal financing to civil servants. It can make direct salary deductions, having obtained the code from Angkatan Koperasi Kebangsaan Malaysia (Angkasa) in 2005. The total loans portfolio in this niche segment has grown in prominence, surging from 1% of MBSB's entire loan base in FY05 to 27.5% in FY10, while its personal loan base has more than quadrupled, from RM92.2 million to RM4 billion, in just five years.

Currently, MBSB has extended RM90 million in personal loans to civil servants through Angkasa, compared with an estimated total market worth RM143 billion, a gap which indicates a potential market of RM53 billion. We see huge potential for MBSB in leveraging the growth in personal financing for civil servants.

Its high impaired loans ratio due to legacy accounts originated from bridging and revolving loans extended to property development projects during the 1997 Asian financial crisis has been trending lower in the past few years. On a brighter note, these loans are collateralised by properties with an estimated market value of RM8.2 billion, which is adequate to cover the RM4.9 billion in gross impaired loans in FY10. Furthermore, MBSB has fulfilled the minimum risk-weighted capital ratio (RWCR) of 7% and achieved the internal target of 7% for core capital ratio (CCR), the minimum required under Basel III. Thus, the company's improved asset quality and capital buffer will firmly anchor its future growth.

We initiate coverage on MBSB with a "buy" call and a fair value of RM2.35. Our valuation is based on a 2.6 times FY11 book value of 90 sen, by applying a 4% growth rate, cost of equity of 11% and return on equity of 22.8%. With earnings on the uptrend, strong growth in personal loans to civil servants and better risk management, we are confident that MBSB will be able to scale new heights. — OSK Research, July 13

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