-  We upgrade our rating on CIMB Group Holdings Bhd (CIMB) to BUY with a higher fair value of RM8.20/share (from RM7.30/share for FY14F earlier). This is based on a possible merger scenario of RHB Cap acquiring CIMB, as part of the mega bank merger proposal.

-  The press reported that RHB Capital (RHB Cap) could become the holding company if it plans to merge with CIMB and Malaysia Building Society (MBSB). It was quoted that one of the routes being considered currently is for CIMB Group to sell off its entire banking business to RHB Cap to be paid by an issuance of new RHB Cap shares.

-  The press reported that this route is being considered as the shareholders’ approval level is much lower for RHB Cap to buy over CIMB, as it will need only 50% plus one share to approve the deal. On the other hand, if CIMB acquires RHB Cap, this will require RHB Cap to obtain 75% approval from its shareholders.

-  To fulfil the aspiration of creating a mega Islamic bank, RHB Islamic Bank will subsequently sell its entire business, in exchange for shares, to CIMB Islamic Bhd, which will end up being the vehicle for the merged Islamic banking businesses. Subsequently, Employees Provident Fund (EPF) will make an offer to buy out the minority shareholders of MBSB. Once that is done, MBSB’s businesses will be injected into the enlarged Islamic bank.

-  Our sensitivity indicates that if RHB Cap acquires CIMB at a P/BV of 1.9x, RHB Cap’s possible book value may rise substantially to RM9.18/share.

-  Based on historical trading bands, we believe that RHB Cap’s share price may hold at its possible new book value of RM9.18/share, or a base case P/BV of 1x. Both banking stocks rarely trade below P/BV of 1x, unless there is a major economic crisis for the country. Even during the recent 2008 external financial crisis, both stocks’ P/BVs rarely dropped below 1x.

-  Assuming a base P/BV of 1x for the enlarged RHB Cap, CIMB may potentially be worth RM8.20/share. Our earlier sensitivity analysis – assuming that CIMB is the acquiring vehicle – indicates a possible fair value of RM6.60/share based on fair P/BV of 1.2x and a potential book value of RM5.68, for CIMB. We believe that this scenario is now widely discounted, and the possible upside for CIMB from this new merger scenario is not yet fully reflected in CIMB’s current share price. The risk-reward trade off for CIMB looks increasingly favourable. We therefore upgrade our rating on CIMB to BUY.

Source: AmeSecurities