- We maintain our HOLD rating on RHB Capital Bhd (RHB Cap) with an unchanged fair value of RM9.50/share. Our fair value is based on the possible merger with CIMB. This is based on our estimated ROE of 11.9% for the enlarged RHB Cap entity, leading to a fair P/BV of 1.3x on an enlarged book value of RM7.19/share.

- The press reported that RHB Cap’s major shareholder, Aabar Investments PJS (Aabar) is now apparently leaning towards supporting the proposed mega-bank merger as “they believe the merger value will be good”.

- The press also reported that this came about due to top-level government-to-government discussions.

- The press quoted sources as saying that in securing Aabar’s compliance, Aabar has likely been given an option to sell its 1MDB Energy Bhd IPO shares back to 1MDB at a price that will definitely cover any shortfall from the RHB Cap deal.

- Aabar was reported to be currently holding an option to subscribe to equity in 1MDB Energy, the power arm of 1Malaysia Development Bhd (1MDB) that is targeting for a USD3bil initial public offering (IPO) in February next year.

- Aabar’s option for shares in 1MDG Energy was reported to have been secured after its parent, International Petroleum Investment Corp (IPIC), provided a guarantee to 1MDB for its USD debt papers of about USD3.5bil. This was to help 1MDB fund the purchases of both Tanjong and Genting power plants in 2012. In return for the corporate guarantee from 1P1C, 1MDB had given a 10- year option to Aabar to acquire up to 49% equity interest in the Tanjong plc and Genting Sanyen Sdn Bhd power plants when the energy division goes for listing.

- Aabar’s entry cost in RHB Cap had been widely reported to be RM10.80/share when it acquired the block from its sister company Abu Dhabi Commercial Bank in 2011. Aabar has been reported to be asking for RM12.00/RHB Cap from this merger. Aabar’s total number of shares in RHB Cap was 546mil as at 30 March 2014, which amounted to a 21.4% stake. The difference between the reported asking price of RM12.00/share, and the merger price of RM10.028/share for RHB Cap, works out to RM1,076mil, on the 546mil shares held by Aabar.

- The news, if true, represents one less significant hurdle to the proposed mega merger. Despite the latest news, we expect share prices of both CIMB and RHB Cap to drift, as synergies will largely be driven mainly by costs.

Source: AmeSecurities