AMMB Holdings offers stable growth outlook

AMMB Holdings Bhd continues to be our top pick in the banking sector for its still-undemanding valuations and stable growth outlook.

We project an annualised threeyear net profit compounded annual growth rate (CAGR) for 2012 to 2015 of 10% (versus 9.4% for the Big 6 banks), with sustained return on equities (ROEs) over the next two years versus a decline for most other banks.

We maintain our “buy” call with a new target price of RM9.10 (from RM8.30) as we roll forward valuations to calendar year 2014 on an unchanged price-to-book value of 1.9 times, supported by a 2014 ROE of 14.5%.

There was not much that was new from our recent company visit to AMMB, and our earnings forecasts are thus unchanged. Management is maintaining its internal targets for the financial year ending March 31, 2014, including net profit growth of 10% to 12%, ROEs of 14% to 14.5% and cost/income ratio (CIR) less than or equal to 46%.

Loan growth, as with all banks, is off to a slow start while net interest margins (NIMs) are still expected to contract by up to 10 basis points (bps).

Positively, however, we believe the group’s CIR has peaked. We see the group moving from negative “jaws” (a measure used in finance to demonstrate the extent to which a trading entity’s income growth rate exceeds its expenses growth rate, measured as a percentage) over the past two years to neutral this year with “jaws” turning positive from 2015, particularly as Kurnia breaks even this year, and MBf Cards in 2015.

That it is business as usual for AMMB is a positive, for we project stable growth with a three-year net profit CAGR of 10% and sustainable ROEs in contrast to the declining ROEs of its larger peers.

AMMB has topped the domestic bond underwriting league table so far this year, reinforcing our belief that the group is a prime beneficiary of increased spending under the Economic Transformation Programme (ETP) and that it will offer stronger earnings growth potential once there are clearer signs of a pick-up in corporate credit demand.

Where AMMB has lagged on the traditional lending business, it has compensated through growth in non-interest income and this is expected to expand further as contributions from Kurnia and MBf Cards kick in. As a result, we expect the group’s non-interest income contribution to total income to average 34% in 2014 versus an industry average of just 29%. OIL & GAS SECTOR By Maybank Investment Bank Overweight (maintained) REUTERS reported that Petroliam Nasional Bhd (Petronas) expects to push back the commissioning of its US$20bil refinery and petrochemical integrated development (Rapid) project in Johor by nine months to Jan 2018.

According to an earlier statement by Petronas, the project was to commence operations by March 2017, which in itself was already a delay given that the Rapid project was originally scheduled to kick off in March 2016.

In reviewing our portfolio, Dialog Group Bhd and Malaysia Marine and Heavy Engineering Bhd (MMHE) have reached our target prices (TP) and as such, we are downgrading both stocks from “buy” to “hold”.

Our top buys in the oil and gas (O&G) sector and for which we see re- pricing catalysts are SapuraKencana Petroleum Bhd (SAKP), Bumi Armada Bhd and Perisai Petroleum Bhd.

Petronas said earlier that the hiccup was due to infrastructure obstacles and the relocation of villages and cemeteries in the area (measuring 2,000ha) surrounding Pengerang. The project is also said to be complicated by a need to secure water supplies, as well as to cater to the needs of international partners.

With these issues, Petronas will also be hard-pressed to meet the April 2014 deadline for its final investment decision on the Rapid project.

We gather that it is still undecided on the design of the facilities there, particularly the specifications of the refinery and petrochemical plants.

The project involves the processing of low-grade heavy, sour crude oil from Iraq.

While a nine-month delay for a massive project is not a major concern, this newsflow will generate some negative sentiment.

O&G companies that are potentially leveraged to this project are: (i) Dialog (tank terminal operations, regasification plant); (ii) KNM Group Bhd, MMHE, Muhibbah Engineering Bhd, SAKP (onshore fabrication works and process equipment); (iii) Gas Malaysia and Petronas Gas (natural gas transmission, additional volume); and(iv) PetronasChemicals Bhd (petrochemicals).

We have downgraded Dialog and MMHE to “hold” now, primarily for valuation reasons.