KENANGA (6483) – A Growth Stock With Decent Dividend Yield?

Reason for the significant earnings improvement

Based on the performance of FBMKLCI and Average Daily Value of KLSE, 2022 and 2023 were lackluster years for the local stock market.

However, despite the weak market sentiment in FY22 and 9M23, KENANGA has reported significantly improved earnings in FY22 and 9MFY23 compared to years before the onset of the Covid-19 pandemic. The key driver behind this growth is the investment and wealth management segment.

The segment struggled in 2016 and 2017 but managed to turn things around in 2018 with minimal profit before tax.

It has since grown significantly and now contributes the most to the company's profits.

This success can be attributed to the rapid growth in the group's assets under management (AUM). In just 10 years, the AUM has surged from RM3.13 billion to over RM20 billion as of the end of 2022.

 

	Assets under Management (RM'm)
2022	> 20,000
2021	18,800
2020	13,830
2019	13,490
2018	7,860
2017	8,700
2016	7,400
2015	6,430
2014	5,450
2013	6,250
2012	3,130

In the third quarter of 2019, Kenanga Investors Berhad (KIB), the asset management subsidiary of Kenanga Group, completed its acquisition of 100% equity share in Libra Invest Berhad, a fund management arm of ECM Libra Financial Group Berhad. The acquisition, has increased KIB’s total AUM to RM13.5 billion, solidifying its position as one of Malaysia’s leading unit trust and asset management companies. (Annual Report 2019)

Are the improved earnings in FY22 and 9M23 sustainable?

The key earnings contributor, the investment and wealth management segment generates income from management fees. Unless there are significant fund withdrawals or a market crash, the earnings from this segment is likely to be recurring and sustainable.

Decent dividend yield

With improving financing performance, KENANGA has consistently paid dividends since FY15 and maintained a generous payout ratio ranging from 60.4% to 89.6%.

 

	EPS	DPS	Payout (%)
2022	7.50	6.00	80.00
2021	16.29	10.50	64.46
2020	14.56	8.80	60.44
2019	3.78	3.25	85.98
2018	1.67	1.10	65.87
2017	3.35	3.00	89.55
2016	2.59	2.25	86.87
2015	1.47	1.00	68.03
2014	3.83	0.00	0.00
2013	0.80	0.00	0.00

With a PATAMI of RM50.6m in 9M23 (full-year FY22: RM54.5m), KENANGA is likely to achieve better full-year results than in FY22. The Company paid a dividend of 6sen/share for FY22.

To be conservative, assuming KENANGA maintain a dividend of 6sen/share for FY23, based on current share price of RM1.01, this translates into a decent dividend yield of about 6%.

INVESTMENT THESIS:

• A decent dividend yield of 6% could limit the downside of the share price. Given the expected better profit in FY23 and potentially FY24, it is not unreasonable to expect a dividend yield of 6% or more.

• Stockbroking and asset management businesses are highly scalable and have low marginal costs, resulting in faster bottom-line growth when revenue improves. A fund manager who manages a portfolio of RM100m can easily handle a larger portfolio, such as RM200m or even RM500m, as fund management is scalable. For this reason, the bottom line grows at a faster pace when revenue improves. The revenue for FY20 and FY21 were roughly about 50% higher than FY19 but the bottom line quadrupled.

• It is a bonus to shareholders of KENANGA if there is a bull market. A bull market would benefit KENANGA through higher brokerage for stockbroking, increased AUM from portfolio appreciation and net inflow of funds, and significant margin expansion due to economies of scale and low marginal costs.

• The market may not be fully aware that the significant improvement in KENANGA's earnings in FY22 and 9M23 (>100%) compared to previous years (FY16, FY17, FY18 and FY19) was primarily due to the recurring contribution from the investment and wealth management segment.

 

CONCLUSION: With a decent dividend yield, KENANGA is worth monitoring as it offers limited downside potential and good upside potential based on historical growth of AUM growth and the scalability of its core businesses.