PETALING JAYA: Investors should accumulate Public Bank Bhd
(PBB) shares, which are currently experiencing some overhang due to the passing of its founder, the late Tan Sri Teh Hong Piow.
“We see this as an opportunity to accumulate on weakness as the bank’s strategic focus remains intact, led by a strong management team,” UOB Kay Hian (UOBKH) Research told its clients in a report.
Maintaining its “buy” call on the lender, the research house said valuations remained attractive and it had a target price of RM5.10 on it.
In the report, the research house said PBB’s share price had modestly underperformed the KL Finance index since the passing of its founder.
The weakness in its share price may be attributed to concerns including the lack of management succession planning and uncertainty of the transfer of ownership of its late founder’s stake.
“It remains hard to predict the outcome of Teh’s 23.4% stake currently valued at RM19.5bil, as we are not privy to the arrangement of his shares and the plans of the individuals inheriting his shares.
“As such, we can only hypothesise a number of potential scenarios and attempt to draw a conclusion as to how it may impact the strategic direction and consequently, share price performance.”
UOBKH Research has laid out four possible scenarios, first in which the stake is injected in a family trust and broken up among his children in stakes of less than 10% each to comply with regulations. They then keep these stakes.
Scenario two involves the children of Teh deciding to dispose of the stakes to institutional investors leading to a full institutionalisation of the bank, run by professional managers.
Scenario three is where the stake is sold to a foreign banking group and lastly, the stake is disposed of to another domestic banking group, which will then launch an offer to acquire and merge with the entire Public Bank group.
“Among the four potential scenarios we listed above, we opine that scenario four provides the least value-added upside.
“This is because PBB’s culture is unique while its key operating metrics are already ranked highly among its domestic peers.
“A potential merger with another domestic bank could be seen as dilutive to the group’s operating metrics and hence, its return on equity. “
Additionally, the potential acquirer who, after having paid a valuation premium (potential goodwill of RM32bil at current market price) for PBB, may also have to contend with the risk of talent attrition, given the vastly different culture within PBB versus its domestic peers.”
UOBKH Research said in order to address this potential risk, the potential acquirer may need to align the cost structure of PBB closer to its own cost structure, post-acquisition.
Among its other positive attributes, PBB has the lowest staff turnover rate among its peers, with a talent retention ratio of 95% versus peer average of 90%, which bodes well for the group’s consistent and successful execution of its business strategy.
It also has a solid senior management team, which ensures continuity in terms of its strategic focus.
