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.

Clarity On AFG

Follow up on AFG call as many have inundated me with "why ah... why ah...", and 99% of the time I do not entertain such emails. I have my bad picks and my good ones, you roll with it. In the case for AFG, it was a combination of a few factors



One, its the nature and characteristics of the stock, each stock has its own character, would you believe. That's because, each stock has its own set of controlling shareholders, substantial shareholder, type of institutional shareholders, the usual amount of free float, the usual amount of average traded volume, the usual daily range of price volatility ...etc. Two, its the potential catalysts available and news flow. Three, its the valuations matrix, is it cheap, why is it cheap ... is it expensive, will it get more expensive, etc.

Hence when you know the character of a person well, and they suddenly behave out of the ordinary (and they usually don't, not in the manner which it did) ... you know that person has done drugs, found religion ... or something like it.

Needless to say, AFG ticks all the boxes for me. But Buffett would probably have been buying this stock for the past 6 months because the valuations were compelling, and would probably sit on it for another 2-4 years waiting for fuller valuations. As I do not have the same fund size as Buffett, I am forced to adopt a momentum-fundamentals investing philosophy - i.e. trying to catch them just as they are about to take off. Call it timing or whatever, its a difficult thing to do.



Herein are the probable explanations cum catalysts:

1) Temasek Pares Down Stakes In Chinese Banks - State-linked Singapore investment firm Temasek Holdings said Wednesday it had sold partial stakes in two of China's biggest banks, Bank of China (BOC) and China Construction Bank (CCB).

"This sale is part of our portfolio rebalancing, which we do from time to time," Temasek spokesman Jeffrey Fang said in a statement. "Temasek continues to hold substantial positions in Chinese banks."

The firm raised $3.62 billion from share placements in the banks -- two of China's "Big Four" lenders -- through holding units, Dow Jones Newswires said, quoting a source familiar with the deal. Temasek unit Fullerton Financial Holdings Pte Ltd sold 5.188 billion shares in Bank of China through placements, raising $2.42 billion. And Cairnhill Investments (Mauritius) Pte Ltd and Crescent Investments (Mauritius) Pte Ltd, two other Temasek units, sold 1.502 billion shares in China Construction Bank to raise $1.2 billion.

Temasek had a 6.76 percent stake, or 16.91 billion shares, in CCB as at December 31, 2010, according to the lender's 2010 annual report. CCB declined to comment but Dow Jones calculations indicate Temasek's stake in China's second-biggest lender has been reduced to around 6.2 percent after the sale. For BOC, Dow Jones quoted the bank's spokeswoman Zhao Rong as saying that Temasek will be left with a 2.2 percent stake in the lender after the transaction. Temasek previously had a 4.06 percent stake in the lender, according to BOC figures.

"We have received notification from Temasek on transferring Bank of China's shares to other institutional investors," Zhao said.

By the end of trade in Hong Kong BOC shares fell 3.63 percent and CCB was down 3.24 percent. The sales come amid concerns about Chinese banks' debt exposure after China's National Audit Office said local governments owed $1.65 trillion as of the end of 2010, of which a big proportion could go sour. However, that announcement -- the first time China has given an overall figure for local government debt -- was followed by a warning Tuesday from ratings agency Moody's that the debt could have been understated by about $541.6 billion. The agency also said a lack of a plan to tackle the bad loans meant it could downgrade its outlook for Chinese banks to negative.

Song Seng Wun, a Singapore-based regional economist with CIMB Research, said the move by Temasek does not mean it has lost faith in the Chinese banking sector.

"They are not exiting the Chinese banks, they still have stakes in these entities. They could have exited completely but the fact that they still have stakes suggest they are rejigging the portfolio."

(Why is this a catalyst? First, there has a been a change in top management of Temasek. It is a portfolio shift for sure. Temasek had ventured under previous top management into various top banks, and got bitten terribly. If I was running Temasek, and I already have a substantial stake in a top banking player from Singapore and in Asia in DBS Bank, why do I think I am a better "manager of banks in picking other banking stocks"? Why don't I reinforce my resources to support and foster expansion for DBS Bank?

It also sends different signals to your CEOs of the portfolio of companies under your care. Imagine Buffett invested heavily in IOI Corp, and then later on taking on smaller stakes in Wilmar and KLK. It may make some sense but what kind of strategy is that for a long term controlling shareholder.

Hence, the move may be one of two things. Reducing China banking stakes in light of potential bad loans. Two, refocusing on core banking stocks. I think its more the latter).

2) You Help Me, I Help You - Its no secret that Bank Negara does not want a sovereign entity holding a near controlling stake in a local bank. Its no secret that Daim also wants to sell at a good price. Its no secret that DBS Bank has been dying to get a decent exposure in Malaysia, the only territory they are not in when its so close to base and so lucrative as well.

Since everybody wants to sell and there are ready buyers, probably even willing to pay a premium, why no deal? Well, its because DBS Bank is a Singaporean bank. Yes, UOB and OCBC have exposure in Malaysia but can you count the number of "allowed branches" they have. If EPU were to OK the deal, DBS Bank would not just be a bit player, it will have over 120 branches immediately - and that is an "issue" people. I am sure Maybank and CIMB would NOT want that scenario to play out.

Well, Temasek can probably say they do not want to sell to anyone except DBS Bank, thats why its been taking so long. Why now then?

Between Malaysia and Singapore, everything can be settled as long as we talk. I bring A, B, C to the table, you give me E, F, G la... This may be just postulation, eerrmmm .... we have the KTM land given back, and we have a multi billion investment into Iskandar region by Singapore inked last week. The timing of AFG's move up coincided pretty well I must say.



3) Compelling Valuations - Even if nothing happens, AFG is a huge laggard. Even with the uptick over the last 3 days, its still barely 1.4x P/B when the rest are at 2.0x or higher. Hence AFG is a no brainer, good dividend yield, potential M&A, making higher highs. Any M&A deal will have to be at the minimum 1.6x-1.7x or at least RM4.90. But I am just postulating and I have been wrong many times.

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.

EON Capital's Fortunes In The Coming Weeks

Business Times, SINGAPORE, Jan 5 — Doubts are surfacing over a possible merger between Hong Leong Bank and EON Bank that would create Malaysia’s fourth-largest bank with assets of RM110.5 billion.

In late December, Hong Leong Bank, which is controlled by the reclusive tycoon Quek Leng Chan, told the stock exchange that it had received Bank Negara Malaysia’s permission to start negotiations with “certain shareholders” of EON Capital to acquire an interest in its smaller rival.

Listed EON Capital wholly owns EON Bank. EON Capital’s largest shareholders are businessman Rin Kei Mei and Sarawak billionaire Tiong Hiew Khiing, who collectively hold 33.2 per cent of the financial firm. Other shareholders include Hong Kong-based investment fund Primus Pacific Partners (20.2 per cent), the Employees Provident Fund (12.1 per cent) and state investment agency Khazanah Nasional (10 per cent).

The sticking point could be price. Local news reports, citing sources, have said that Quek would be willing to pay between RM5.50 and RM6 per EON Capital share, which would value the bank at one-1.2 times book.

“A previous attempt several years ago stalled over pricing: Mr Quek is not known to pay more than what he considers fair.’

But officials familiar with Rin and Tiong said that they would expect at least RM8-8.20 a share, which would value the bank at almost 1.6 times book. There is no certainty that a deal will be struck, as this is not the first time Hong Leong Bank has eyed EON Capital. A previous attempt several years ago stalled over pricing: Quek is not known to pay more than what he considers fair.

So far, nothing has happened as Quek is said to be abroad. The Star newspaper, citing sources, said yesterday that the Employees Provident Fund and Khazanah are ‘believed’ to have exited from EON Capital. But a government official denied this.

“We haven’t received any offer so far,” he told BT.

It is also not clear where Primus would stand. Three years ago, the investment fund bought into EON Capital for a hefty RM9.55 apiece – a price Quek would probably consider astronomical. And the opposite could be said about Quek’s speculated buying price — RM5.50-6 — as far as Primus is concerned. Indeed, there is talk that Primus is approaching other funds to make a rival bid for EON Capital. According to The Star, the fund approached Singapore’s Temasek Holdings.

In theory, this makes sense. Temasek manages Malaysia’s smallest bank, Alliance, so aligning with Primus could pave the ground for an ultimate merger between EON Bank and Alliance Bank. But the Singapore investment agency has not commented publicly on The Star’s story.

What is clear is that Malaysia’s central bank would encourage a merger. Indeed, the move towards a possible merger reflects Bank Negara’s wish to winnow the Malaysian banking sector to a few large banks, to better withstand increased foreign competition starting this year. Malaysia now has eight local banks. — Business Times Singapore

My Take: The local media seems to be a lot more excited and certain that the deal will go through. My view is that Quek wants this deal as it seems that he will NOT be able to get the Public Bank under his wings - pricing for PBB and the size may have been the obstacles to getting PBB (please read my posting on CIMB-PBB).

http://malaysiafinance.blogspot.com/2009/12/my-prediction-for-1-biz-news-in-2010.html

Quek cannot afford not to buy another bank as that would mean some other bank getting a lot bigger when the dust settles. I do agree its a matter of pricing. If its below RM6.00 as the article above stated, I am very sure the owners would not sell. Its a sellers' market, not a buyers' market.

The angle which many have not paid sufficient attention to is the Primus block, which had a high entry price. I am certain they would have approached Temasek, which controls AFG (Alliance Bank). Please read my posting on AFG to get a grasp on their side of things.

http://malaysiafinance.blogspot.com/2009/12/whats-up-with-afg.html

Hence it is clear that Bank Negara would NOT want a sovereign wealth fund to be owning a Malaysian bank. It looks increasingly likely that DBS Bank will be asked to take over the stake, as its the only Singapore bank that still do not have a banking presence in Malaysia. Would Bank Negara frown on that? Not really as both sides are opening up.

Would Bank Negara frown on DBS Bank taking over AFG and bidding for EON Cap at the same time? I really don't think so. If indeed DBS Bank is taking over AFG, then it would also make sense to bid for EON Cap - not that they really need to. Of course DBS Bank could come in and bid for EON Cap first before swallowing AFG. I doubt very much that Temasek will be allowed to bid for EON Cap as I am certain Bank Negara do not want that to happen when they are trying to get Temasek to divest AFG.

If DBS Bank gets approval, watch EON Cap fly. Quek can wait for a better price but he cannot afford to wait till DBS Bank or some other bidder comes into the fray, and end up engaging in a price war. On balance of the above, I think Quek will try and make a deal soon, closer to RM8 and not closer to RM6.

Just my dua sen...


p/s photos: Devon Aoki

What's Up With AFG

For those who tracks the market closely, they would have noticed the surreptitious uptrend in AFG. However, when you pick up most of the research on the stock, its usually a Neutral rating or Under perform tag on it. Hence it is likely to bought up NOT on fundamentals alone. It is one of the ten anchor banks, but also the smallest one. It is obvious that Bank Negara still wants more consolidation and it would not surprise me if there are only 7 banks left standing by end of 2010.

Back to AFG, its main stake is held by Temasek and there have been word that Bank Negara does not want a sovereign wealth fund to hold a banking stake. Apparently moves are in place to switch the stake to DBS Bank. DBS Bank is the last of the 3 main Singapore banks without a proper "exposure" in Malaysia. In one fell swoop, DBS Bank could have about 80 branches. The good thing about having DBS Bank is that there will be a more decisive way to manage the bank, either via capital injections or acquisitions. In fact, if DBS Bank gets in directly, you can be sure that they will pick up even more shares from the open market. Upside is there because its still below 2.0x PB value as it was considered to be a smallish bank in Malaysia, its who persona changes if DBS Bank was to emerge.

It would be thought to be difficult to allow DBS Bank into Malaysia but I think there are already like-minded high powered people who think its better to open up both ends. If one were to visit Singapore, you will find CIMB preparing itself to up the ante in Singapore. Things are opening up and its good for both sides.

p/s photo: Meisa Kuroki