STOCKSTALK | OCTOBER 30, 2015 7:30AM
Public Bank – Too richly valued?
While Public Bank Bhd remains
fundamentally strong, it is also an expensive stock and there appears little
excitement in way of share price. Some analysts are starting to voice
concerns over ROE and EPS growth.
Business model: Public Bank Bhd was established by Teh Hong Piow in 1966 and it is
Malaysia’s third-largest bank as well as the third-largest company listed on Bursa
Malaysia. It had an asset size of RM345.7 billion and a market capitalisation of RM71
billion as of the end of 2014.
The group has a network of 259 branches and 1,801 self-service terminals across
Malaysia. It also has a presence across Asia, with 83 branches in Hong Kong, three
branches in China, 27 branches in Cambodia, seven branches in Vietnam, four branches
in Laos and three branches in Sri Lanka.
According to its website, the group collectively serves more than nine million customers
in the countries where it operates.
It offers a range of financial products and services which include personal banking,
commercial banking, Islamic banking, investment banking, share broking, trustee
services, nominee services, sale and management of unit trust funds, bancassurance and
general insurance products.
According to its website, Public Bank’s strategy “remains focused on organic growth in
the retail banking business particularly on the retail consumers and small and medium
enterprises. The group is committed to sustain its strong business performance and
leading market shares to maintain its premier status in the Malaysian banking
industry”.
Standard & Poor’s has an “A-” long-term rating and “A-2″ short-term counterparty
credit rating with a stable outlook on Public Bank. Moody’s Investors Service has a
foreign currency long-term deposit rating of “A3″ and short-term deposit rating of “P-2″
with a positive outlook.
Ratings agency RAM has a long-term rating of “AAA”, the highest it can accord, and a
short-term rating of “P1″ for Public Bank.
Shareholders and management: Teh founded Public Bank in 1966, after he left
Maybank Bhd. He has been the driving force of the group’s growth since then and
remains its chairman. He is 85 years of age and because of his age, the topic of
succession has been openly debated.
Public Bank’s chief executive officer (CEO) and managing director (MD) is Tay Ah Lek,
who is aged 72. Tay is one of Public Bank’s pioneer staff having joined the company in
1966. He was made executive director in June 1997 and redesignated as CEO and MD in
July 2002.
Tay sits on the board executive committee which is chaired by Teh. Also on the
committee is Quah Poh Keat, who is the deputy CEO.
Main shareholders are Teh, who holds a direct stake of 0.64% and an indirect stake of
23.28% via Consolidated Teh Holdings Sdn Bhd, and the Employees Provident Fund,
which owns a 14.87% stake.
Share
performance: According to Bloomberg, Public Bank has been trading in a 52-week
range of RM17.04 to RM19.90.
It has a one-year return rate of 0.71% and therefore has outperformed the FBM KLCI
which has a return rate of -6.11%.
It has also outperformed Maybank Bhd, which has a one-year return rate of -8.55%, and
CIMB Bank Bhd with -25.85% – both these banks are larger than Public Bank in terms
of asset size.
According to Reuters, the group has a beta coefficient of 0.8, and is therefore trading
below the overall market volatility. A value of 1 reflects the average volatility of the stock
market.
What analysts think: Out
of the 24 research houses listed by Reuters, the majority of 11 have “hold” calls.
Meanwhile, three have “buy” calls and four have “outperform” calls. While six others
have “underperform” calls on Public Bank.
Among the research houses monitored by KINIBIZ, two have “hold” calls and one each
with a “neutral” and “market perform” call. There are two calls to “sell” or “reduce”. And
one rating Public Bank as “buy”.
Overall, most analysts have maintained their calls on Public Bank, which is mainly a
“hold” call, because most see the stock as being too richly valued.
CIMB Research, however, has voiced an added concern over the group’s earnings per
share (EPS) growth which it expects to be weak at 2% in financial year 2015 (FY15) and
7.6% in FY16. Meanwhile, TA Research downgraded Public Bank after its third quarter
of financial year 2015 (3Q15) results on the basis that upside on the stock (including
dividend yields) has narrowed to less than 10%.
Taking the opposite and positive view, Affin Hwang said it reiterated its “buy” call at a
12-month target price of RM21.80. It has based this on the fact that Public Bank is
trading at a forward 2.2 times of 2016 estimated price-to-book value (P/BV) which is
more than 1 standard deviation point below its past nine-year-average P/BV of 2.4
times.
Earnings forecast:
StockStalk: It has been a tough year so far for the banking sector, but Public Bank has
managed to buck the trend in its third quarter 2015 results where it recorded a nett
profit of RM1.2 billion. This translates into modest growth of 0.4% quarter-on-quarter
and 0.8% year-on-year.
Positively for Public Bank, its loans grew 13% versus the 10% seen in the previous year’s
corresponding period. This means it outpaced the the industry which saw an average
loan growth of 8.2% for the period under review.
However, in general, Public Bank’s results are in line with what analysts expected and
therefore the group has not exactly outperformed.
The banking group is known for being an entity with solid fundamentals but is also
known for being one of the more expensive stocks. Neither of those things have changed
of late with the general consensus being that the stock is too richly valued. Analysts are
also concerned about weaker EPS, weaker return on equity and slower growth
prospects.
Therefore, while Public Bank remains fundamentally strong, there is not a lot of room
for excitement in terms of share price given the general sluggishness of the economy.
Given that its current share price is not particularly cheap, investors will not really be
getting the shares at much of a discount either.