Affin: A Cheap Banking Stock?

Background

Affin Holdings Berhad ('AFFIN') is a financial services conglomerate, involved in the provision of commercial, islamic and investment banking services, money broking, fund management, underwriting of general and life insurance business.

AFFIN is considered by many to be the weakest banking group in Malaysia. As an indication, I have computed the Return on Equity for the 3 banking stocks under my coverage (see the table below). You can see that the average ROE for AFFIN is 2 percentage points lower than AMBANK and CIMB.

 
Table 1: AFFIN's ROE compared with AMBANK & CIMB
 
Historical Financial Performance

From the graph below, we can see that AFFIN's earning grew steadily after the Global Financial Crisis ended in 2009. Like CIMB, AFFIN's earning peaked in 2013.


Graph 1: AFFIN's last 10 years' Financial Performance

The decline in earnings could have bottomed. The past 2 half-yearly results show sequential improvement which suggests the next profit cycle may be starting.


Graph 2: AFFIN's Financial Performance for the last 10 half-years

Recent Financial Result

Looking at the table below, we can see that the last 2 quarters' earnings (QE30/9/2016 & QE30/6/2016) are beginning to pull away from the RM100 million mark- a level that sustained AFFIN in the preceding 3 quarters (QE31/3/2016, QE31/12/2015 & QE30/9/2015). When will AFFIN's earning touch the RM200 million mark last seen in QE31/12/2014?


Table 2: AFFIN's last 8 quarterly result


Graph 3: AFFIN's last 8 quarterly result

Valuation

AFFIN (closed at RM2.33 yesterday) is now trading at a PER of 9.2x (based on last 4 quarters' EPS of 25.22 sen). Its Dividend Yield for FY2015 was fairly commendable at 3.4%.

In addition, AFFIN is the cheapest banking group in term of Price to Book Value. Its PB stood at only 0.5x (based NTA of RM4.53 per share as at 30/9/2016). I feel that the market has unfairly discounted this stock because of its poor ROE (see above).

Technical Outlook

AFFIN has dropped back to its "baseline" at RM2.00-2.10. Its indicators show a stock that's deeply oversold and due for a rebound/recovery. Its monthly MACD has crossed above its MACD signal line in 1-2 months. Its stochastic is oversold and has begun to swing back up. ADX has hooked down for the past 3-4 months - indicating weakening of downtrend momentum. Long-term trend reversal is not at hand yet as -DMI is still above +DMI.


Chart 1: AFFIN's monthly chart as at Dec 14, 2016 (Source: ShareInvestor)

The weekly chart shows AFFIN is now above the triple moving average lines (10-w SMA, 20-w EMA & 30-w EMA lines), which means that the stock should be moving higher. This is also confirmed by the MACD indicator, which has gone above the zero line. I feel that any dip toward the 10-w SMA line (around RM2.25) could be a good opportunity to buy into the stock.


Chart 2: AFFIN's weekly chart as at Dec 14, 2016 (Source: ShareInvestor)

How far would a decent rebound/recovery in share price go? If we can use the 1999 recovery as a guide, we can see the earlier rebound retraced 50% of the lost ground in 1998. If the same retracement were to take place in the developing rebound, AFFIN may touch a high of RM3.00. See the twin charts below.


Chart 3: AFFIN's monthly chart (x2) as at Dec 14, 2016 (Source: ShareInvestor)
  
Conclusion

Based on possible recovery in earning, undemanding valuation and tentative technical signs of a bottom, AFFIN could be a good stock to consider for a recovery play.

Note:

I hereby confirm that I do not have any direct interest in the security or securities mentioned in this post. However, I could have an indirect interest in the security or securities mentioned as some of my clients may have an interest in the acquisition or disposal of the aforementioned security or securities. As investor, you should fully research any security before making an investment decision.