MBSB: Long-term Value Proposition (UPDATED)

MBSB has gone ex its 2-call Rights Issue of 1-for-1 @RM1.00. The ex-date was June 21. The first call of RM0.59 shall be payable on application while the second call of RM0.41 shall be capitalized from the share premium account. The theoretical ex-right price is RM0.83 (arrived at by adding up the closing price on the last cum-date of RM1.07 & the subscription price of RM0.59, and then dividing the total by 2).

The important dates for this rights issue exercise are:
1) Date for commencement of trading of rights: June 27
2) Date for cessation of trading of rights: July 4
3) Date of acceptance of rights: July 13
4) Date of listing of rights shares: July 26

After MBSB went ex on Tuesday, MBSB traded at around RM0.80. Investors are very concerned that there is something wrong with the stock.


Chart 1: MBSB's daily chart as at Jun 21, 2016 (Source: Kenanga/Chartnexus)

The purpose of this post is to answer the following questions:

• Should I hold onto the stock?
• Should I subscribe for the rights?

To answer these questions, let's begin by looking the fundamentals & technical aspects of the stock.

Result Update

For QE31/3/2016, MBSB's net profit rebounded up by 28-fold q-o-q to RM35 million while revenue was down 1.6% q-o-q to RM812 million. The q-o-q increase in PBT was mainly due  to lower allowances  for  impairment losses on loans, advances and financing. (Note: The results for QE31/3/2016 was announced on May 12.)


Table: MBSB's last 8 quarterly results

A closer look at the chart below reveals that MBSB's earnings peaked in June 2014. Since the, its bottom-line has been sliding even though top-line increased. This is due to higher allowances for impairment losses as MBSB raised its provision to match the standard of commercial banks.


Chart 2: MBSB's last 47 quarterly results

Valuation

MBSB (at RM0.795 yesterday) is now trading at a trailing PER of 25 times (based on the annualized EPS of 3.16 sen). The high PER is due to continuous provisioning made to raise its loan standard. A better indication of its potential is its low Price to Book ratio of 0.7x (compared to Maybank's PBR of 1.3x or AMBank's PBR of 0.9x).

Technical Outlook

MBSB share price has been trending lower since it peaked in October 2014. The potential trend reversal was noted in my February 2015 post.


Chart 3: MBSB's weekly chart as at June 21, 2016 (Source: Kenanga/Chartnexus)

MBSB may find support at the horizontal line at RM0.70-0.72. It is not likely that we may see a test of the next horizontal line at RM0.50-0.52 since that's below the first call of RM0.59 in the present rights issue.

 
Chart 4: MBSB's monthly chart as at June 21, 2016 (Source: Kenanga/Chartnexus)

To sell or not to sell?

The earlier questions - to hold onto the stock and/or to subscribe for the rights? - are the same. It revolves around the question of whether MBSB's financial performance will deteriorate further and drag down its share price.

I believe that MBSB's poor financial performance could have been overstated by the need to raise its impairment loss provision. Whether this tougher standard is really needed is questionable. If the company can recover from the current lending environment without a crisis; the share price would certainly rebound back. The reason why it has made higher impairment provision is that it aspires to be a full-fledged Islamic bank. Currently, it is a finance exempt company – a company that carries on financing business without a banking license. For more, go here.

When it finally achieves its goal of becoming an Islamic bank, it may be valued differently. That could be the reason why an experienced ex-banker, Chua Man Yu bought a 6.06%-stake into MBSB on February 29. I am unable to find out the price paid by Chia Man Yu but it shouldn’t be too far from the closing price on February 29 of RM1.33 (here). Even at that point of time, the planned rights issue for MBSB has been announced (here). If Chua Man Yu – who was the co-founder of RHB Bank – felt that MBSB was a good deal at RM1.33 in February, it could be an even better deal at around RM0.80 today!!

Thus the depressed share price today could be a possible buying opportunity? The question could be re-framed: Should I buy?!

(Note: The post was updated by replacing the 3 price charts and the commentary in the section "To Sell or Not To Sell" has been revised to include in the point about Chua Man Yu's investment in the stock in February.)

Conclusion

Based on reasonable valuation & deep sell-down, MBSB could be a good stock for a contrarian long-term investment.

Note: 
In addition to the disclaimer in the preamble to my blog, I hereby confirm that I do not have any relevant interest in, or any interest in the acquisition or disposal of, MBSB.