Focus on BIMB before the group restructuring exercise
BIMB Holdings Bhd SHARES have generated strong interest since the company reported better-than-expected earnings for 2020. Investor attention also comes ahead of a group restructuring exercise – which is expected to be completed by August – which , analysts say, will deliver significant shareholder value.
Most of the regulatory approvals needed for the restructuring, notably from Bank Negara Malaysia and the Ministry of Finance, are already in their pocket.
The next step now is for BIMB – 52.97% owned by Lembaga Tabung Haji (TH) – to get shareholder approval at a fully virtual Extraordinary General Meeting (EGM) on March 31.
BIMB owns 100% of Bank Islam Malaysia Bhd and holds 59.45% of the capital of Syarikat Takaful Malaysia Keluarga Bhd (STMK). The restructuring exercise will ultimately result in Bank Islam resuming BIMB’s main market listing status, while STMK will retain its separate listing status.
“The restructuring exercise presents a compelling near-term opportunity to accumulate BIMB, in addition to its fairly resilient Islamic banking business with good fundamentals,” AllianceDBS Research said in the March 17 report.
The research house improved its call to action to “buy” to “hold” and increased its target price from 75 sen to 4.60 RM.
“BIMB’s restructuring exercise… would allow investors direct access to its highly profitable takaful business, which has a return on equity (ROE) of over 20%. Given the relatively illiquid nature of STMK, this presents an attractive – albeit short-term – opportunity for existing shareholders, ”he adds.
Bank Islam achieved an ROE of 9.4% last year.
Bloomberg data shows seven analysts have a “buy” recommendation on BIMB – with target prices ranging from RM 4.35 to RM 5.25 – while one has a “hold” and another a “sell” “.
The 12-month average target price is RM 4.63, suggesting a further rise from BIMB’s closing price of RM 4.25 last Thursday. At RM 4.63, its market cap was RM 7.88 billion.
The stock has gained 43.1% in the past 12 months. During this period, it hit a low of RM2.82 on March 24 of last year, six days after the imposition of the first order of movement controls in the country, and peaked at RM4.40 on December 16.
“The positive of this [restructuring] is that it should help improve the overall transparency of Bank Islam, which will be directly listed, while freeing up its latent value, ”explains Maybank Investment Bank (IB) Research.
Bank Islam is one of only two autonomous Islamic banks in the country. The listing will propel it to become the first fully-fledged listed Islamic financial institution in the region.
BIMB had announced a series of proposals for the restructuring of its group on December 11, 2019, but the ensuing Covid-19 pandemic delayed those plans. The key elements of the restructuring are: a private placement of new shares to raise 800 million ringgit, a cash consideration to the holders of warrants for the cancellation of their rights to exercise the warrants, the sale of activities brokerage and leasing from BIMB to Bank Islam, a cash distribution of Bank Islam and STMK shares to BIMB shareholders and transfer of BIMB’s listing status.
The placement of the shares may or may not be carried out by its main shareholders TH, the Employee Provident Fund (which has a stake of 12.24%) and Permodalan Nasional Bhd (5.07%).
BIMB is raising funds through the private placement to fully settle the outstanding sukuk held by TH. It has the approval of Bursa Malaysia to issue up to 222 million shares in conjunction with the placement.
AllianceDBS notes that BIMB would still need to disburse around RM 155 million to fully repay the sukuk as well as RM 162 million to settle the group’s 427 million outstanding warrants (at 38 sen per warrant).
“BIMB will also cover RM 33 million for transaction-related expenses. In total, the group will have to bear 349 million ringgit for the total cost of the transaction, assuming it is able to increase the target amount of its private placement. Along with the sale of non-STMK subsidiaries to Bank Islam for RM 112 million, BIMB as a holding company is expected to have sufficient cash reserves to cover transaction costs with its RM 318 million in cash (as of end December 2020 ) and RM 59 million in dividends from STMK. (paid in January 2021) ”, he indicates.
On February 26, BIMB announced that it had set the price of the warrants at 38 sen each on the basis of the five-day volume-weighted average price of the warrants until February 25 inclusive, being the last trading day before immediately on the pricing date. The price was set after taking into account the availability of its internal cash reserves to settle the warrants.
A virtual meeting called by the court of the holders of the outstanding warrants will be held on March 31, after the EGM.
BIMB reported net profit of RM720.25 million for the fiscal year ended December 31, 2020, down 8.5% from a year ago. Nonetheless, its profits are 4% higher than analysts’ consensus, mainly due to lower-than-expected provisions. The net provision for impairment on financing amounted to RM 894.1 million compared to RM 1.05 billion a year earlier.
“No major signs of stress on the quality of Bank Islam’s assets, the bank surprised with a sharp recovery in provisions in 4Q2020, contributing to better-than-expected results,” Maybank IB Research said in a post-results report. The recovery in 4Q2020 thwarted the industry’s trend towards higher provisions during this quarter.
Bank Islam’s profit before zakat and taxes, at RM 728.2 million for fiscal 2020, accounted for the bulk of BIMB’s PBZT of RM 1.09 billion that year. Bank Islam’s gross funding increased 11% year on year, far outpacing the sector’s 4.4% growth, while its gross questionable funding ratio (GIF) stood at a low 0.67%.
Analysts say the lender has one of the highest margins among its peers, at around 2.4%, given its high proportion of high-yield personal finance, which accounts for over 40% of its financing portfolio. total. Nonetheless, the financing portfolio is strong, as the majority of personal financing repayments are taken directly from borrowers’ salaries.
BIMB recently revealed that around 8% of the bank’s retail borrowers – covering RM3.2 billion in loans or around 5.8% of its funding base – currently benefit from targeted repayment assistance.
CGS-CIMB Research is less optimistic about the bank. “We maintain our ‘reduced’ rating on BIMB in anticipation of a 48% increase in its funding loss provision for fiscal 2021, given the expected increase in the industry’s gross impaired loan ratio.” said the research agency, which expects BIMB’s GIF ratio to drop from 0.67% to 1.15% by the end of 2021.