AFG Worth Re-Entering Now

Now that Maybank and CIMB have left RHB alone, RHB is going after OSK. The EON Bank saga is finally over. There seems to be a timetable for banking mergers to be completed?!!?


Whatever it is AFG looks like a great candidate for re-entry at current prices.

 As a stock it is relatively safe, it has one of the more stable net dividend yields of over 4%. The other decent counters in that category include: Maxis (net yield of 7.2%), Sunway REIT (6.1%), DIGI (5.8%), Public Bank (4.2%), Malaysian Airports (4.0%) and the Alliance Finance Group (4.0%).


Despite the weak markets for the last few weeks, the stock price never went below RM3.00. The buying has been very keen in waves over the last few days, especially Friday. My gut feel is that AFG should announce a big deal very soon.

Undeservedly, it has probably the lowest PER for 2011 earnings at around 10.6x, maybe its due to its size. It certainly traded at the lowest Price to Book ratio of just 1.3x. Public Bank trades at 3x, CIMB at 2.2x, Maybank at 1.8x, while AMMB and RHB are both around 1.6x.

One sure thing is that given its size (smallish) and it cheap pricing, some foreign banks should be very keen to acquire AFG to get a foothold in Malaysia’s lucrative consumer banking sector.

The other factor could be that its Singapore investment arm holding the cards. Langkah Bahagia's interest in AFG is through a company called Vertical Theme, which is a joint venture between it (51 per cent) and Singapore state investment firm Temasek Holdings (41 per cent), that together own 29 per cent of AFG. First one must get the nod from Singapore, and then get the second nod from Bank Negara as an approved bidder.

In all likelihood, it needs to get bigger very fast or else will lose out even as a smaller nimbler player. If you consider the 4 major Singapore banks, only DBS Bank does not have an exposure in Malaysia, guess who owns DBS Bank. The other potential has to be Keppel Bank.


The key question is if DBS Bank really buys AFG, isn't the upside dictated by the terms of the deal? What if the deal is a market price thing, e.g. swap shares or transacted at RM3.40 ... what will happen then? We have to remember that it is highly unlikely that DBS would want to do a G.O., and neither is that palatable to Bank Negara. DBS may ask for a waiver from doing a mandatory G.O. if its crosses the 32% threshold, it will want to cross that because for accounting reasons and control purposes. Without a G.O., will the share price run then? Yes, because its DBS Bank, with its foothold investors will expect an aggressive move into the big leagues. Finally, a bank to be an alternative to the mega-deals besides CIMB/Maybank. As things stand now, DBS is already offering mega sized funding via offshore units to Malaysian public entities, one can just imagine the muscle with the banking license. Then you have to think of EPF, whom I am certain will keep upping its stake in AFG. Its only fair to allow Malaysian public interest to be represented in a foreign own "controlled financial industry". EPF would see to it that it gets a hefty slice of the action going forward. Put all that together, even if the deal is a market price deal, you can be assured of a major re-rating in the event of a deal.

I like the volume build up. Even if nothing eventuates in the short term, holders are relatively sheltered by its low P/B ratio and high net dividend yield. But if there is a M&A exercise, you can be sure that pricing will have to be at least 1.6x-1.7x minimum or RM4.96 - RM5.27. You do the math and the risk-reward yourself. Maybe the pricing may have been affected owing to the recent market turmoil. Even factoring another 10% discount you are looking at RM4.50 as a fair dealing price.

NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.