-  We maintain our HOLD rating on CIMB Group Holdings Bhd (CIMB) with a revised fair value of RM6.85/share (vs. RM7.10 previously).

-  This is based on revisions to our ROE estimates to 11.9% (from 9.1% previously), leading to a new fair P/BV of 1.3x (vs. 1x previously), but on a much lower book value estimate of RM7.19/share (vs. RM9.85/share previously).

-  We have clarified with CIMB on our assumptions for the enlarged entity’s book value. We understand that under MFRS3 accounting standard, CIMB would be deemed as the acquirer. This is because CIMB is the larger entity with majority management control.

-  Under this scenario, we understand that CIMB’s book value (and not RHB Cap’s book value) should be taken as the starting point, in estimating the enlarged entity’s book value.

-  Based on this, we have derived a new book value for the enlarged entity at RM7.19/share, which differs from our previous estimate of RM9.85/share. We have further confirmed with CIMB that the book value of the enlarged entity is around RM7.00/share, which is in line with our new estimates.

-  Given the lower equity base, our estimated ROE is therefore much higher at 11.9%, instead of our earlier forecast of 9.1%. Thus, applying Gordon Growth valuation methodology, we derive a higher fair P/BV of 1.3x for the enlarged entity.

-  In terms of fair value, this is balanced against the lower book value of RM7.19/share, vs. RM9.85/share earlier. All in, we derive a higher fair P/BV of 1.3x for the enlarged entity, or a fair value of RM9.46/share (vs. our earlier estimate of a base P/BV of 1x, or RM9.83/share).

-  Applying a share swap ratio of 0.72 RHB Cap share for every 1 CIMB share (based on 1 RHB Cap share for every 1.38 CIMB share, we derived a fair value of RM6.85/CIMB share. This is not much different from our earlier estimated RM7.10/CIMB share.

-  All in all, despite the adjustments, there is no upside to CIMB’s fair value. We maintain HOLD.

Source: AmeSecurities