MBSB- serving a niche market

Background

There have been a number of research reports calling a BUY on MBSB. The basis of many of these reports is the improved financial performance. For example, Kenanga expects MBSB's EPS to continue to grow from25.23 sen for FY2010 to 41.22 sen for FY2012.


Table 1: MBSB's financial performance for FY2009-11 & forecast for FY2012-13

Its big advantage is that it can lend to government servants and collect the repayment amount via direct deduction. The only other financial institution which enjoys the same advantage is Bank Rakyat. RCECap has a slightly different arrangement, where it lends to government servants via a government servants' cooperative.

Valuation

Kenanga valued MBSB based on 1.8 times its book value for FY2012, which gives a fair value of RM2.50. This works out to be about 4.3 times its EPS for FY2012. This is deemed conservative when compared to commercial banks which are currently valued at 7-15 times their earning for FY2011-2012.


Table 2: MBSB's Valuation table

My concern

The market for government servants' borrowing is quite substantial. MBSB is expected to lend out RM3 billion to this sector this year. These loans attract interest at a rate of 5.0-5.5% per annum. Sometime back, there were some clamoring that the government should curb excessive borrowings by government servants. The counter argument is that government servants still have financing needs and institutions such as MBSB & Bank Rakyat can provide cheaper financing than commercial banks or other financial companies. I am not too sure about commercial banks' lending rates for personal loans but RCECap is reported to charge interest rate of 8-9% per annum. If the government were to clam down on lending to government servants, MBSB would loose a very lucrative source of income which would seriously impact its bottom-line.

Mitigating Factor

MBSB's major shareholders are EPF (65.5%) and PNB (11.9%). They have invested heavily into this company when it went into financial difficulties. They injected new capital into the company and would certainly hope to recoup their investment. Being GLCs, they would expect the government to be supportive of the business of MBSB.

Technical Outlook

CIMB had called a trading BUY on July 25 (as pointed out by Myshare2U). From Chart 1 below, we can see that MBSB broke above its medium-term downtrend line at RM1.60 yesterday. It gapped up on opening but profit-taking occurred in the afternoon. The stock ended with a shooting star, which marked a potential short-term trend reversal subject to confirmation tomorrow. Its immediate support is at RM1.70 (closing of the gap), downtrend line breakout level of RM1.60 & the horizontal line at RM1.50.


Chart 1: MBSB's daily chart as at Aug 4, 2011 (Source: Quickcharts)

From Chart 2 below, we can see that MBSB could swing up to the fair value as computed by Kenanga research.


Chart 2: MBSB's monthly chart as at Aug 1, 2011_plotted on log scale (Source: Tradesignum)

Conclusion

Based on the above, I believe MBSB could be a good investment stock for medium-term. Since the shooting star has been sighted, we should wait for a clear sign as to the stock's short-term direction.