UOB Kay Hian Malaysia Daily: Comprehensive Analysis of CIMB Group and Fraser & Neave Holdings

November 7, 2024

UOB Kay Hian

CIMB Group (CIMB MK)

Overview

CIMB Group, Malaysia’s largest investment bank and the second-largest consumer bank, is one of Southeast Asia’s leading universal banking groups. The group’s management remains optimistic about hitting its return on equity (ROE) targets, driven by stable net interest margin (NIM) and non-interest income growth. Despite these positive outlooks, the stock is currently trading at a level that reflects these optimistic projections.

Financial Position and Projections

• Asset Quality: CIMB’s asset quality remains stable with improving delinquency rates in Malaysia’s SME and consumer segments and a downward trend in Indonesia’s retail and non-retail loans. However, Thailand’s consumer finance delinquency rates, while elevated, have stabilized.
• Net Credit Cost: Management has maintained its 2024 net credit cost guidance of 30-40bp, suggesting a potential uptick in 2H24. However, given the improving delinquency rates and a current loan loss coverage ratio of 100%, the net credit cost is expected to land at the lower end of the guidance.
• Net Interest Margin (NIM): Sequential improvement in NIM is expected to taper off as deposit re-pricing approaches its tail end. NIM is projected to expand by 3bp in 2024, aligning with management’s stable to +5bp guidance, but likely to remain flat at around 2.22%.
• Non-Interest Income: Non-interest income growth remains strong, driven by trading and forex gains, with a projected 10-12% yoy growth for 3Q24. However, slower growth is anticipated in 2025 as trading and forex opportunities diminish.

Stock Performance and Valuation

• Loan Growth: Loan growth is projected at the lower end of management’s 5-7% full-year 2024 guidance. The focus is on consumer and SME loans while being selective on corporate loans.
• Operational Costs: 2024 operational costs could remain elevated due to ongoing accruals for union staff salary adjustments and higher bonus accruals. This conservative approach aims to avoid lumpy staff cost provisions in later years.
• Capital Management: Following a 7 sen/share special dividend in 2Q24, the focus remains on maintaining a CET1 ratio of 14-15% to stay conservative amidst potential impacts from Basel 4.
• Outlook: Key targets for 2024 include an ROE of 11.0-11.5%, loan growth of 5-7%, a cost-to-income ratio below 46.9%, net credit cost of 30-40bp, and NIM stable to +5bp.

Financial Highlights

• Net interest income: RM11,623m (2022) to RM14,601m (2026F)
• Non-interest income: RM4,198m (2022) to RM6,329m (2026F)
• Net profit: RM5,433m (2022) to RM9,310m (2026F)
• EPS: 52.6 sen (2022) to 82.9 sen (2026F)
• PE ratio: 15.6x (2022) to 9.9x (2026F)
• Dividend yield: 3.2% (2022) to 5.6% (2026F)

ESG Updates

• Environmental: Commitment to provide RM30b in sustainable financing by 2040 and transition to zero carbon emissions by 2050.
• Social: 30% female directors on the board and greater financial inclusion for vulnerable communities.
• Governance: 60% of the board comprises Independent Non-Executive Directors (INED).

Fraser & Neave Holdings (FNH MK)

Overview

Fraser & Neave Holdings (F&N) is a leading beverage player involved in the manufacture, sale, and marketing of soft drinks, dairies, and non-carbonated drinks. Despite external delays to its dairy project, the impact on the company’s overall prospects remains largely neutral. F&N continues to focus on its mid-stream dairy projects and aims for production commencement to coincide with the dairy project’s first milking.

Financial Position and Projections

• Dairy Project: The first batch of livestock from the US faced a delay due to concerns raised by the Malaysia Department of Veterinary Services (DVS). The worst-case scenario is a 6-12 month delay, but the impact is deemed neutral as the project would see initial losses and the mid-stream processing facilities will be ready only in 2026.
• Capex and Midstream Projects: Capex for Phase 1 of the dairy project has increased to RM1.85b. Related midstream projects include a RM180m dairy plant in Cambodia and a RM12.3m can milk filling and packing line in Pulau Indah.
• Dairy Uptake: F&N aims to produce 200m litres of milk annually across Phase 1 and 2, with earmarked sales to Singapore, Cambodia, and the domestic market.
• Thailand Operations: Thailand’s operating margins were impacted by frontloaded advertising and promotional expenses (A&P) in 4QFY24. However, this is expected to position FY25 more favourably with an anticipated recovery in operating margins.

Stock Performance and Valuation

• Gemas Project: Despite delays, the dairy project holds significant promise with an addressable dairy market worth close to RM5b annually. F&N’s extensive distribution network and cost advantages from growing its own crops contribute to its competitive edge.
• Earnings Revision: FY25-26 earnings have been revised down by 9.0/10.8% to account for lower sales and margin assumptions. Key risks include rising commodity prices and US\$/RM forex rates.
• Valuation: Maintain BUY with a target price of RM36.30, based on a DCF with assumptions of a WACC of 7.4% and terminal growth of 3.0%. This implies a 23.8x FY25F PE, below its five-year mean of 24.7x.

Financial Highlights

• Net turnover: RM5,001m (2023) to RM6,423m (2027F)
• EBITDA: RM789m (2023) to RM1,093m (2027F)
• Net profit: RM537m (2023) to RM640m (2027F)
• EPS: 128.9 sen (2023) to 174.4 sen (2027F)
• PE ratio: 24.0x (2023) to 17.7x (2027F)
• Dividend yield: 2.5% (2023) to 3.0% (2027F)

ESG Updates

• Environmental: Reduced solid waste intensity ratio by 62% from 2017.
• Social: 69% male and 31% female workforce, with over 97% of senior managers hired locally. Reduced sugar content in beverages by 59% since 2004.
• Governance: Six out of 11 board members are independent directors.

Strategy – Malaysia: Assessment of Trump’s 2nd US Presidency

Overview

Donald Trump has been re-elected as the United States President in the 2024 Presidential Election. His second term is anticipated to bring about policies that could positively impact global equity markets, although higher market volatility is expected.

Policy Implications

• Disinflationary Potential: Trump’s intention to end the Russia-Ukraine war could override his protectionist policies, potentially disinflating the global economy.
• Trade Policies: While Trump’s talks on imposing blanket import tariffs may be diluted, his presidency could perpetuate trade diversions into ASEAN countries, including Malaysia, due to continuing trade persecution against China.
• Green Agenda: Rolling back government incentives for the Green Agenda could negatively impact solar and offshore wind projects, EV initiatives, and bio-fuel projects, potentially affecting the Malaysian plantation sector.

Market Impact

• The gloves sector may benefit from higher import tariffs against Chinese glove products.
• Malaysian companies with US presence could gain from lower corporate tax rates.
• The technology sector’s recent rally may not be directly supported by Trump’s policies.

Technical Analysis

Eastern & Oriental (EAST MK)

Technical BUY with +16.9% potential return

Last price: RM0.89

Target price: RM0.995, RM1.04

Support: RM0.86

Stop-loss: RM0.855

BUY with a target price of RM1.04 and stop-loss at RM0.855. EAST’s share price has been gradually climbing higher after establishing a support level at RM0.86. This is supported by an uptick in the RSI and a bullish crossover in the DMI, indicating stronger momentum that could lift share price higher. We peg our targets at RM0.995 and RM1.04 in the near term.

Notion Vtec (NVB MK)

Technical BUY with +20.2% potential return

Last price: RM1.09

Target price: RM1.17, RM1.31

Support: RM0.835

Stop-loss: RM0.83

BUY with a target price of RM1.31 and stop-loss at RM0.83. NVB charted a long white candlestick that closed above the BBI line, 7-day, and 21-day EMA lines, suggesting that the recent consolidation could be over. This is supported by an uptick in the RSI and volume, alongside positive readings in both the MACD and DMI, which should support the stock’s uptrend. We peg our upside targets at RM1.17 and RM1.31.

Conclusion

The detailed analysis of CIMB Group and Fraser & Neave Holdings highlights the optimistic yet cautious outlook for both companies. CIMB’s focus on stable asset quality and non-interest income growth, along with strategic loan growth and operational cost management, positions it well for stable performance. Meanwhile, F&N’s steadfast commitment to its dairy project and strong market presence in Thailand and other regions underpin its growth potential despite temporary setbacks. Investors should consider these comprehensive insights when evaluating investment opportunities in these companies.