AMMB: downgrade to neutral at RM5.40, TP of RM5.60

AMMB Holdings Bhd
(Aug 3, RM5.15)  
Downgrade to neutral at RM5.40 with a target price of RM5.60: The group has proposed to undertake a dividend re-investment plan as part of its capital management exercise, whereby shareholders of AMMB have the option of reinvesting their dividend entitlements in new AMMB shares. This will give AMMB greater flexibility to meet capital adequacy requirements.

This is similar to Maybank’s proposed dividend re-investment scheme, which provided the group with flexibility to boost its core equity ratios, on which Basel 3 is expected to put greater emphasis. The group’s core equity ratios were already at a comfortable 8.2% as at March 31, 2010. As such, the proposed scheme is a conservative step taken by the management to gradually raise AMMB’s core equity buffers progressively over the next few years without the group resorting to aggressive equity fund raising.

The degree of dilution will depend on: (i) the issue price of the new shares; (ii) quantum of dividends paid; (iii) level of shareholder participation; and (iv) the board’s decision on the portion of the cash dividend that shareholders can elect to re-invest as new shares.

Based on our assumptions of a 22% dividend payout ratio for FY2011 and FY2012, and assuming that the entire dividend payout can be converted into new shares, our estimate of the full-equity dilution impact would be slightly less than 2% for FY2011/12.

Given the limited upside to our unchanged target price, we are downgrading our recommendation on the stock to neutral. A longer-term expansion in less volatile transaction fee income and a solidifying forex and derivative platform could be the group’s key catalysts for its medium-to-longer term return on equity (ROE) targets of 15% to 18%. The group’s immediate-term margins are likely to be pressured by the rising interest rate environment given its high fixed rate loan portfolio and relatively low current account saving account (CASA) deposit base.

We are maintaining our target price at RM5.60 (1.6 times FY2011 PBV, underpinned by 12% FY2011 ROE). We prefer RHB Capital within the mid-size domestic banking space for its superior ROEs of 14% and undemanding 1.2 times to 1.3 times FY2010/11 PBV. — OSK Research, Aug 3