- We are upgrading our rating on CIMB Group Holdings (CIMB) to BUY from HOLD, with a fair value of RM6.60/share. This is based on an ROE of 11.5% FY15 on a standalone basis, leading to fair P/BV of 1.4x.

- CIMB, RHB Capital Berhad (RHB Cap) and Malaysia Building Society Berhad (MBSB) have announced that they have ceased discussions on a proposed merger and creation of a mega Islamic bank in light of the current economic conditions. With that, the exclusivity period pursuant to the exclusivity agreement between CIMB Group, RHB Cap and MBSB on 10 July 2014 has expired.

- The call-off of the merger is a major surprise, and is highly positive in our view, as it signals that the deterioration at CIMB Niaga may now be arrested.

- This is because one of the reasons cited for the merger was for CIMB to be less exposed to volatility in any particular segment, e.g. the Indonesian market.

- CIMB’s share price has fallen by 21% from RM7.24 when the merger was first announced.

- We think that the cancellation of the merger is a major boost to confidence due to two main reasons: First, it stems the downward spiral in earnings downgrades prompted by the urgency of the mega merger.

- Secondly, it also removes concerns on whether the reported merger synergies of RM1bil-RM1.2bil could be realised.

- CIMB’s current traded price implies that the market is expecting an ROE of 10.9% or net earnings base of RM4.2bil for FY15F. Consensus forecasts for net earnings is RM4,635mil with ROE estimate of 11.8%.

- Based on our revised ROE of 11.5%, we peg CIMB’s fair value at RM6.60/share. We think that there is now better hope of earnings improving to RM4.5bil (vs. our previous forecast is RM4.2bil) in FY15F, given the willingness to cancel a merger that is highly uncertain in realising synergies.

Source: AmeSecurities