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MBSB's intrinsic value remains intact

Malaysia Building Society Bhd (May 23, RM1.49)
Maintain buy at RM1.52 with higher revised fair value of RM2.90 (from RM2.20):
We have raised MBSB's fair value based on a higher adjusted (for rights) FY11F return on equity (ROE) of 24.4% (20.5% previously), leading to an upgraded fair price-to-book ratio of 3.3 times (from 2.6 times).

We have lifted our net earnings for FY11F to FY13F by 33%, 26% and 13% on the back of our more robust loans growth assumptions for the personal loans segment as well as better non-interest income.

With the upgrade, we now forecast a much stronger earnings growth of 63% for FY11F, 18% FY12F and 17% for FY13F.

We believe MBSB is under-appreciated for its earnings potential, which is similar to that of the mainstream banking institutions. Although MBSB benefits from the vacuum left behind by cooperatives, which are no longer allowed to offer personal financing to civil servants, we believe what is often overlooked is the fact that the financiers to these cooperatives are the mainstream banking institutions.

Thus, in a way, MBSB is now capturing some market share in this segment from the mainstream banking institutions.

To get a gauge on how undervalued MBSB is, we have estimated that its share of sector (including all the domestic banks under our coverage) net earnings now stands at 1.4%. Yet, MBSB's share of the sector's market capitalisation is vastly lower at only 0.6%.

At our upgraded fair value of RM2.90, we estimate that MBSB's share of sector market capitalisation would be 1.4% which is a fairer reflection of its share of sector net earnings.

Given that our net earnings have been raised, we are also upgrading our dividend forecasts as the company has put in place a formal dividend payout policy of 30%. This means that gross dividend per share (GDPS) yield is now highly attractive at close to 6% for FY11F.

With a strong GDPS yield of 6%, we believe there is little downside to MBSB. If we are to base value on net DPS yield of 3.3%, similar to current one-year fixed deposit rates, we estimate MBSB's share price to be at least RM1.93 a share, with potential for further dividend increases ahead as earnings rise.

We believe MBSB remains deeply undervalued. Notably price-earnings ratios are at single digit levels. Rerating catalysts for the stock are: (i) higher than expected loans growth; (ii) better than expected net interest margins; (iii) continuing improvement in impaired loans; (iv) sustainably high ROE in excess of 20%; and (v) actual dividend payout ratio of at least 30%. — AmResearch, May 23

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