- We are maintaining 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 11.2% FY15F for the enlarged RHB Cap entity, leading to a fair P/BV of 1.3x on an enlarged book value of RM7.93/share.

- The press reported that there is a high chance the proposed mega merger between CIMB, RHB Capital (RHB Cap) and Malaysia Building Society Bhd (MBSB) may be called off. This is a surprise to us.

- One of the reasons given for the possible call-off is that RHB is seeking a revision of the terms, as CIMB’s share price has fallen substantially since the merger was first proposed in July 2014.

- It was reported that RHB Cap may now require a shares and cash combination as consideration, instead of an all shares deal. This means that CIMB may have to fork out more cash, and that valuation may go up and the deal may therefore no longer be feasible for CIMB.

- Without the merger, we estimate that RHB Cap’s fair value on a standalone basis to be at RM8.40/share. This is based on an ROE of 10.7% for FY15F, leading to a fair P/BV of 1.1x based on a book value of RM7.75/share for FY15F.

- We also believe there is good possibility that other banks may consider a merger with RHB Cap. In this case, we believe that the merger valuation for RHB Cap will likely be similar, at around the proposed 1.4x under the mega merger scenario.

- RHB Cap’s share price has fallen sharply in recent weeks, which we believe is partly due to its correlation to CIMB’s share price via the proposed mega bank merger swap ratio of 1 RHB Cap share for every 1.38 CIMB share. The stock is now trading at 1x P/BV for FY15F, based on our projected book value of RM7.75/share.

- All in, we think there is not much downside for RHB Cap at this level, given that its revenue momentum was stronger than that of CIMB in recent quarters.

- The latest scenario suggests a possible trading opportunity for RHB Cap’s share price, as valuation looks cheap even without the merger.

Source: AmeSecurities