CGS International (CGS), in its Company Note today (Mar 27), said the stock broking house initiated coverage on CIMB Group Holdings with an Add call and a target price (TP) of RM8.60 as CGS regards the bank as being undervalued.
Its CY25F P/E of 8.4x is significantly below its 5-year historical average of 12.4x as well as lower than the sector’s P/E of 9.7x and those of its closest peers (Maybank’s 10.7x and Public Bank’s 10.3x).
CIMB is among our top picks for Malaysian banks, CGS said, and envisage multiple re-rating catalysts for the stock, including (1) strong net profit growth of 10.1% in FY24F, (2) expansion in ROE from 10.7% in FY23 to 11.1% in FY24-25F, (3) an increase in dividend payout ratio, and (4) above sector loan growth.
The potential downside risks to CGS’s call are material deterioration in asset quality (especially in Indonesia) and further contraction in net interest margins caused by elevated deposit competition.
High exposure to fast-growing Indonesian market not priced in
CGS sees stronger growth prospects for Indonesia’s banking industry vs. Malaysia.
CGS’s Indonesia banking analyst projects swift loan growth of 11-12% and high net interest margin of above 5% for Indonesia banks in 2024F vs. their expectation for loan growth of 4- 5% and NIM of c.2% for Malaysian banks.
CIMB’s 92.5%-owned subsidiary in Indonesia, CIMB Niaga, contributed 27% to its FY23 pre-tax profit (PTP), making CIMB’s Indonesia contribution the largest among Malaysian banks; the next highest was Maybank with 6.2%.
CGS thinks a strong Indonesia exposure gives CIMB an added advantage vs. its local peers and yet it trades below its comparable peers, such as Maybank and Public Bank.
As such, CGS believes the above positive attribute has not been priced in.
Projecting strong net profit growth of 10.1% in FY24F
CGS forecasts strong net profit growth of 10.1% for CIMB in FY24F, which would be underpinned by their projection of 8% revenue growth (+10.4% for net interest income and +3.1% for non-interest income).
Cost-wise, CGS is forecasting an increase of 5.2% in overheads and 8.3% in loan loss provisioning (credit cost).
CGS has pegged a target price of RM8.60 to CIMB Group Holdings
Consistent with their approach for all Malaysian banks, CGS employs a dividend discount model (DDM) to value CIMB.
CGS key DDM parameters are cost of equity of 9.5% (risk-free rate of 4% and market risk premium of 6%), terminal growth rate of 4% and DPS growth of 5% for the 15-year interim growth phase.
With this, they arrived at a TP of RM8.60 for CIMB.
