AFG’s current undemanding valuations warrant a rating upgrade — Analysts

KUCHING: In light of the recent undemanding valuations of Alliance Financial Group Bhd (AFG), the research arm of Kenanga Investment Bank Bhd ( Kenanga Research) has raised its call on group to ‘outperform’.

In a results note, Kenanga Research justified its upgrade move by explaining that it anticipate the stock’s potential total returns to look attractive, especially as its earnings had recently rebounded with the first three months of FY18’s (3M18) core net profit (CNP) improving by 1.9 per cent as topline growth grew by 6.3 per cent.

“The improved topline is broadly supported with Islamic banking Income leading the charge at 15.8 per cent y- o-y, followed by fee-based income at 8.1 per cent yo-y and fund-based income at 2.5,” stated the research arm.

While this was offset by a 66.5 per cent y-o-y surge in impairment allowances, the 3M18 results were still deemed to be in line as it met 27 and 26 per cent of Kenanga Research’s and consensus full-year estimates.

Despite the call upgrade, the research arm also guided that it expect FY18 to be a challenging year for AFG due to higher operating expenditure as management rolls out new innovative products and higher allowances for impairments.

AFG’s management has concurred with this view by guiding for FY18 CIR of below 51 per cent and credit costs between 30 to 35 basis points with conservative loans growth at mid-single digit.

The conservative growth expectations are anticipated due to poor loans growth in Q1 volume failing to compensate for the run- off in HP and mortgage loans.

But moving forward, it is understood management will no longer be focusing on mortgage loans in anticipation of NSFR9 and instead expected a good pipeline of loans coming from corporate supported by growth in unsecured loans and the SME segment.

“Management is also encouraged by the strong acceptance of its Alliance One Product which grew by circa RM300 million by July 2017 and is expecting to introduce more cost- saving measures such as the MSS and VSS in the second half of the year, which should see some circa RM5 million in savings for FY18,” said the research arm. Hence, Kenanga Research has decided to hike its earnings estimates for AFG marginally by 0.8 per cent to RM500 million.