This article first appeared in The Edge Malaysia Weekly on March 22, 2021 - March 28, 2021

SHARES of BIMB Holdings Bhd have generated strong interest since the company announced better-than-expected earnings for 2020. Investor attention also comes ahead of a group restructuring exercise — anticipated to be completed by August —that analysts say will unlock significant value for shareholders.

Most of the regulatory approvals needed for the restructuring, including from Bank Negara Malaysia and the Ministry of Finance, are already in the bag.

The next step now is for BIMB — 52.97% owned by Lembaga Tabung Haji (TH) — to get its shareholders’ approval at a fully virtual extraordinary general meeting (EGM) on March 31.

BIMB fully owns Bank Islam Malaysia Bhd and has a 59.45% stake in Syarikat Takaful Malaysia Keluarga Bhd (STMK). The restructuring exercise will ultimately result in Bank Islam taking over BIMB’s Main Market listing status, while STMK will retain its separate listing status.

“The restructuring exercise presents a compelling near-term opportunity to accumulate BIMB, on top of its fairly resilient Islamic banking business with good fundamentals,” AllianceDBS Research says in March 17 report.

The research house upgraded its call on the stock to “buy” from “hold” and increased its target price by 75 sen to RM4.60.

“BIMB’s restructuring exercise … would see investors gain direct entry into its highly profitable takaful business, which has a return on equity (ROE) of over 20%. Given the relatively illiquid nature of STMK, this presents an attractive — albeit a short-term — opportunity for existing shareholders,” it adds.

Bank Islam had an ROE of 9.4% last year.

Bloomberg data shows that seven analysts have a “buy” recommendation on BIMB  — with target prices ranging from RM4.35 to RM5.25 — while one has a “hold” and another a “sell” .

The average 12-month target price is RM4.63, suggesting further upside from BIMB’s closing price of RM4.25 last Thursday. At RM4.63, its market capitalisation stood at RM7.88 billion.

The stock has gained 43.1% over the last 12 months. Within that time frame, it hit a low of RM2.82 on March 24 last year, six days after the first Movement Control Order was imposed on the country, and peaked at RM4.40 on Dec 16.

“The positive of this [restructuring] is that it should help improve the overall transparency of Bank Islam, which will be directly listed, while unlocking its latent value,” says Maybank Investment Bank (IB) Research.

Bank Islam is one of only two standalone Islamic banks in the country. The listing will propel it to become the region’s first listed pure-play full-fledged Islamic financial institution.

BIMB had announced a series of proposals for its group restructuring on Dec 11, 2019, but the subsequent Covid-19 pandemic delayed those plans. The key components to the restructuring are: a private placement of new shares to raise RM800 million, a cash consideration to warrant holders for cancelling their exercise rights to the warrants, the disposal of BIMB’s stockbroking and leasing arms to Bank Islam, a distribution-in-specie of Bank Islam and STMK shares to BIMB shareholders and the transfer of BIMB’s listing status.

The placement of shares may or may not be taken by its major shareholders TH, the Employees Provident Fund (which holds a 12.24% stake) and Permodalan Nasional Bhd (5.07%).

BIMB is raising funds through the private placement to fully settle outstanding sukuk held by TH. It has Bursa Malaysia’s approval to issue up to 222 million shares in conjunction with the placement.

AllianceDBS notes that BIMB would still need to fork out around RM155 million to fully repay the sukuk as well as RM162 million for the settlement of the group’s 427 million outstanding warrants (at 38 sen per warrant).

“BIMB will also defray RM33 million for expenses related to the transactions. In total, the group will have to bear RM349 million for the total transaction cost, assuming it is able to raise the targeted amount from its private placement. Along with the sale of non-STMK subsidiaries to Bank Islam for RM112 million, BIMB as the holding company should have sufficient cash reserves to cover transaction costs with its RM318 million cash (as at end-December 2020) and RM59 million in dividends from STMK (paid in January 2021),” it says.

On Feb 26, BIMB announced it had fixed the warrant price at 38 sen each based on the five-day volume-weighted average price of the warrants up to and including Feb 25, being the last market day immediately preceding the price-fixing date. The price was fixed after taking into consideration the availability of its internal cash reserves to settle the warrants.

A virtual court-convened meeting of the holders of the outstanding warrants will be held on March 31, after the EGM.

BIMB posted a net profit of RM720.25 million for the year ended Dec 31, 2020, down 8.5% from a year ago. Nevertheless, its earnings were 4% above analyst consensus numbers, mainly because of lower-than-expected provisions. Net allowance for impairment on financing stood at RM894.1 million compared with RM1.05 billion a year earlier.

“With no major signs of asset quality stress at Bank Islam, the bank surprised with a net writeback in provisions in 4Q2020, contributing to better-than-expected results,” Maybank IB Research stated in a post-results report. The writeback in 4Q2020 bucked the industry trend of higher provisions in that quarter.

Bank Islam’s profit before zakat and tax, at RM728.2 million in FY2020, accounted for the bulk of BIMB’s PBZT of RM1.09 billion that year. Bank Islam’s gross financing grew 11% year on year, far outpacing the industry’s 4.4% growth, while its gross impaired financing (GIF) ratio stood at a low 0.67%.

Analysts say the lender has one of the highest margins among its peers, at about 2.4%, given its high proportion of high-yielding personal financing, which accounts for over 40% of its total financing book. Nevertheless, the financing book is solid, given that the majority of the personal financing repayments is deducted directly from borrowers’ salaries.

BIMB recently revealed that about 8% of the bank’s retail borrowers — covering RM3.2 billion in loans or about 5.8% of its financing base — are currently under the targeted repayment assistance.

CGS-CIMB Research is less bullish on the bank. “We retain our ‘reduce’ rating on BIMB on expectation of a 48% increase in its FY2021 financing loss provisioning, in view of the expected rise in the industry’s gross impaired loan ratio,” says the research outfit, which expects BIMB’s GIF ratio to increase from 0.67% to 1.15% at end-2021.

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