KUCHING: Affin Holdings Bhd’s (Affin) proposed acquisition of a stake in Bank Ina Perdana would enable the group to tap into the fast growing financial market in Indonesia.CIMB Investment Bank Bhd (CIMB) in a research report cited that it was optimistic on the proposed acquisition as the Indonesian market offered a huge population of about 240 million and had an under-penetrated financial market, as reflected by its loan to Gross Domestic Product (GDP) of about 35 per cent against 100 per cent for Malaysia.
It noted that the Indonesian market was expected to register strong loan growth of 15 per cent to 20 per cent per year in the next two to three years.
Additionally, it observed that Affin could expand its Islamic banking business and possibly, investment banking in Indonesia if the acquisition went through.
On the other hand, CIMB cautioned that Affin might take a longer than expected time to extract value from the acquisition due to its lack of experience in running overseas operations.
Further, there was no information being released on Bank Ina Perdana in terms of size, fundamentals, profitability, branch networks and so on.
Interestingly, despite its size as one of the smallest banks in Malaysia and perceived to be lacking of resources for regional expansion, Affin was Malaysia’s fourth largest bank apart from Malayan Banking Bhd (Maybank), CIMB Group Holdings Bhd (CIMB Group) and RHB Capital Bhd (RHB Capital) to venture into the Indonesian market.
Meanwhile, the research firm pointed out that the impact of the proposed acquisition on Affin’s bottomline and earnings per share (EPS) would depend on the valuation of Bank Ina Perdana.
It believed that the pricing would not be cheap judging from the last two deals where Maybank acquired a 97.5 per cent stake in Bank Internasional Indonesia (BII) in 2008 at 4.2 times price to book value and RHB Capital’s proposed purchase of an 80 per cent stake in Bank Mestika at 3.5 times price to book value.
In the meantime, the balance sheet of Affin remained strong as at end of September 2009, CIMB stated that the bank has not issued any hybrid Tier-1 capital and had a subordinated loan of RM300 million.
Likewise, CIMB noted that Affin has the capacity to raise another RM5 billion to RM6 billion non-equity capital to finance the acquisition.
The research firm did not rule out the possibility of Affin financing the acquisition by rights issue as this would sustain the core capital ratio, especially if paid a significant premium over the book value, leading to higher goodwill.
In another development, it was reported that Affin could be acquired by a midsized Malaysian bank as the major shareholder of the potential acquirer was said to be eyeing stakes in Bank of East Asia, which owns 20 per cent of Affin.
CIMB also believed that the potential purchase of a stake in Indonesian bank would make Affin an even more attractive takeover target as the Indonesian operations could offer better long-term growth prospects than the Malaysian operations.
Therefore, the research firm maintained its earnings forecasts and target price of RM3.25 per share for Affin, pegged to a 5 per cent premium to its dividend discount model valuations.
It said the dividend discount model remained intact, including a cost of equity of 14.7 per cent and dividend growth rates of 18.2 per cent for the interim growth phase and 6 per cent for the long-term growth phase.