KUALA LUMPUR: Challenges on Malaysia Building Society Bhd's (MBSB) income will persist given its unfavourable fixed-to-variable product mix while credit cost may stretch further to bolster the group's loan loss coverage ratio.
In saying this, Kenanga Research said investors have rallied strongly on the back of strengthened prospects fuelled by MBSB's inorganic growth and synergistic benefits to be reaped from the nearing completion of its merger with MIDF group.
However, the firm believes the enlarged MBSB may require some time to implement its strategies to yield its desired growth trajectory.
"Our immediate-term return on equity (ROE) expectations linger at just above 5.0 per cent, which indicates that the group's double-digit target requires a doubling of earnings and a prolonged period to meet.
"Hence we believe the risk-reward for the stock is somewhat unfavourable at current price points, notwithstanding the erosion of dividend yields owing to its prior strong buying interest," it said.
The acquisition of MIDF at a share swap consideration of RM1.01 billion is satisfied via the issuance and allotment of about 1.05 billion new MBSB shares to Permodalan Nasional Bhd (PNB), the sole shareholder of MIDF.
While the transaction value could have been on the higher end at PNB's expense as MBSB traded at about 0.5 times prior to the deal, Kenanga Research said the fund had a longer-term stance in terms of incremental value and earnings accretion made possible from the deal.
"With the merger, MBSB would shape up to be a full-fledged bank with complete end-to-end banking services."
Kenanga Research introduced a refreshed financial year 2023 (FY23) earnings forecast of RM473.5 million for MBSB.
The first quarter FY23 earnings forecast of RM74.1 million will make up 16 per cent of Kenanga Research's full-year assumptions.
The firm said the remaining periods could be lumpier mainly on the back of lower tax burden.
"Hence, we maintain our 'Underperform' call with a higher target price of 67 sen from 51 sen," it added.