AmResearch
Hong Leong Bank - Unknown capital buffer from treasury shares BUY
- We maintain our BUY rating on Hong Leong Bank Bhd (HLBB) with an unchanged fair value of RM17.00/share. This is based on an ROE of 14.1% for FY15F and a fair P/BV of 1.9x.
- The company hinted that its in-house estimated amount of rights issue (if so required) by 2018, to be about 50% higher than our forecast of RM1.6bil. This is assuming a 2ppt buffer above any minimum required common equity Tier 1 (CET1) ratios with other regulatory buffers thrown in.
- Recall that – based on our forecast rights issue of RM1.6bil and assuming this is to be done via a rights issue priced at a 20% discount to the current market price, or at RM11.20/share – we had earlier estimated the rights issue to be on a 1-right-for-12 shares basis involving 148mil rights shares.
- If the rights issue amount is about 50% higher than our estimates, it may involve about 215mil rights. Assuming a similar price of RM11.20/share, we estimate that this may lead to an issuance on a 1-right-for-9-share basis, which remains digestible in our view.
- The company also confirmed that it has 81.1017mil treasury shares, with a low cost of only RM5.32/share.
- The total cost of these treasury shares is RM431.5mil, which is included as part of its treasury shares of RM645.6mil in its shareholders’ funds. (We understand that the RM645.6mil amount includes ESOS shares as well).
- These treasury shares are recorded as a negative item in the shareholders’ funds currently, which reduces the CET1 accordingly.
- At the current market price of RM14.00/share, we estimate that these 81.1mil treasury shares are worth RM1.15bil, providing an excellent buffer in capital.
- We understand that there are no firm plans by the company for these treasury share, which it intends to maintain as a buffer in its books for now.
- All in all, we think that any possible rights issue is probably well known in the market already. However, what is probably lesser known is its excellent hidden capital buffer of RM1.1bil in its treasury shares, which may reduce its rights issue requirement eventually.
Source: AmeSecurities
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