By SHAZNI ONG
Hong Leong Investment Bank Bhd (HLIB) has maintained its ‘Hold’ rating on Public Bank Bhd, but with a lower Gordon Growth Model-based target price of RM24.40 (from RM26.50), based on 2.15 times 2019 price-to-book.
In a research note last Friday, the research house said it is not amply attractive to warrant a recommendation upgrade, despite its share price skidded 9% year-to-date (YTD).
“In our view, the stock’s risk-reward profile remains balanced given long-term positives like strong asset quality and an above average return on equity (ROE) generation track record which got defused by short-term concerns such as modest earnings growth outlook, unattractive dividend yield offering, and high foreign shareholding level (susceptible to sell-off).
“Overall, we cut our FY19-FY20 earnings forecasts by 2%-3% and introduce FY21 estimates,” HLIB said.
The research house said this is in line with its five-year mean of 2.15 times, but above the sector’s 1.15 times.
“The premium can be justified by its strong asset quality and ROE generation track record.
“Despite the 9% skid in share price, risk-reward profile has not become convincingly attractive, plagued by: (i) modest earnings growth outlook; (ii) unattractive dividend yield of 3%; and (iii) high foreign shareholding level at 37.4%,” HLIB said.
According to the research house, Public Bank is one of the worst performing banking stocks under their coverage as the share price took a beating of 9% YTD.
“Major bugbears were: (i) fear of an Overnight Policy Rate cut; (ii) dim earnings outlook; (iii) rich valuations; and (iv) high foreign shareholding. Hence, we reassess our investment thesis and its risk-reward profile,” HLIB said.
The research house also said the bank’s management telegraphs a downbeat outlook for 2019 as it is poised to grapple with a challenging macro climate.
“We believe the lurch will come primarily from weak revenue, which leads to a negative Jaws (Ratio) and impact overall profitability.
“This year, we see a net interest margin slippage of four basis points versus the mid-single digit decline guidance due to ongoing sector-wide rivalry for retail deposits.
“Besides, non-interest income is not expected to be a top-line booster as we are projecting a slow growth of 2%,” HLIB said, considering tepid unit trust incomes as investor sentiment remains gloomy, while muted loans growth and softer consumer spending trend point to dull fees and commission incomes.
HLIB also said Public Bank is now placing more emphasis on further improving its information and communications technology, and digital infrastructure to play catch up with peers.
“Over the next three years, information technology-related capital expenditure is budgeted to rise by 50% versus the RM400 million spent from 2016 to 2018. Overall, it has guided cost-to-income ratio (CIR) to be at 34%-35% this year; we have built in a similar CIR assumption of 34% into our financial model,” the research house added.