We maintain our GGM-derived PBV TP of RM1.90 (COE: 11.5%, TG: 3.0%, ROE: 6.0%) but downgrade our recommendation to UP (from MP). Its share price saw rising interest following the strategic entry of the Sarawak State Government as a shareholder. While the group shared its view on the prospects there, we remain sceptical of it being a leading driver to meet the group’s medium-term targets. Broadly, the group may see 1HCY24 facing hurdles hinged on underlying macro concerns with hopes for recovery in 2HCY24.

We hosted a meeting with the group to obtain updates, chiefly on opportunities opened with Sarawak State Government’s 4.8% shareholding (through the Sarawak State Financial Secretary). Key takeaways are as follows:

- A call to improve Sarawak’s financial infrastructure. We gathered that Sarawak has an address able population of up to 3m concentrated between its key cities of Kuching, Sibu, Bintulu and Miri. While AFFIN has six branches collectively there, there is a need to elevate accessibility for financial services, particularly in the rural areas. To support this cause, the group is looking into expanding its branch network into the teens but with no indication on its timeline for now. This could also include a wider footprint of offsite ATM and CRM machines across the state with mobile financial centres set up in more rural areas.

- Potential upside with Sarawak’s prosperity. As of its 3QFY23 reporting, Sarawak-based accounts comprised of RM2.8b (4%) of its total loans. We opine that a larger presence could drive its books share here, albeit not likely to surpass its KL (22%) or Selangor (31%) portfolios. On the flipside, we note that the group has been aggressive with its issuance in debt capital market products which may benefit from the state’s participation.

- Stretched targets remain in spite of near-term headwinds. In lieu of a heightened rate environment, the group may be holding back on its mortgage growth strategies until rates are more palatable for consumers. Additionally, with certain SMEs seeing dampened asset quality, no thanks to unfavourable macros, the group may be required to review its position here. That said, broader financing prospects may come from ongoing infrastructure projects, while demand for automobiles (<RM200k) still appears supportive. To recap, the group’s FY25 targets include: (i) PBT of RM1.5b; (ii) ROE of 10%; and (iii) loans book of c.RM90b. For the immediate FY23, the group has set a PBT target of RM600m.

Post update, we leave our FY23F/FY24F assumptions unchanged.

Downgrade to UNDERPERFORM (from MARKET PERFORM) with an unchanged TP of RM1.90. We maintain our GGM derived PBV of 0.35x (COE: 11.5%, TG: 3.0%, ROE: 6.0%) on our FY24F BVPS of RM5.33. AFFIN’s share price saw strong appreciation with the inclusion of Sarawak State Government amongst its shareholders, spurring hopes of substantial spillovers from there. We believe it could be overbought with our abovementioned discussions indicating that immediate benefits need to be more meaningful. Paired by the group’s below-industry ROE, we view risk-reward to be unfavourably skewed. There is no adjustment to our TP based on ESG given a 3-star rating as appraised by us.

Risks to our call include: (i) higher-than-expected margin expansion, (ii) higherthan-expected loans growth, (iii) better-than-expected asset quality, (iv) surge in capital market activities, (v) favourable currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 23 Jan 2024