- We are upgrading our rating on RHB Capital Bhd (RHB Cap) to BUY from HOLD, with a fair value of RM9.30/share (vs. RM9.50/share previously, which was based on the possible merger scenario). Our fair value is now based on an estimated ROE of 11.0% (previously 10.7%) for FY15F, leading to a fair P/BV of 1.2x.

- RHB Cap FY14 net earnings surpassed our forecasts by 7.3% and consensus forecast by 1.4%. The main variances to our forecast were the better-than-expected non-interest income line, as well as the low loan loss provision from good recoveries. We like RHB Cap’s latest set of results, which indicates strong revenue growth lines and ongoing good momentum from all divisions, despite major distraction from the mega-merger.

- The good FY14 results have prompted us to upgrade our net earnings for FY15 by 8.5%. This leads to a higher ROE of 11.0%, close to the company’s newly articulated ROE target of 11.5%. Our fair value thus works out to RM9.30/share, based on a fair P/BV of 1.2x.

- At the briefing, the company has confirmed that it is likely to be embarking on some form of capital raising exercise in the near term, and hopes to finalise the details in three months once approvals have been finalised by regulators. This confirms earlier market speculation of a potential right issue, and is thus not a major surprise to us.

- The good news is that the latest 4QFY14’s group CET1 ratio had increased substantially to 9.8%, from 9.1% in 4QFY14. Thus, the potential size of the rights issue may now be only RM1.4bil based on our estimates, rather than our earlier preliminary estimate of RM2.8bil.

- Our sensitivity analysis indicates that if the rights issue is priced at a 20% discount, or say RM6.40/share, this may involve up to 218mil new rights shares on a 1-right-for-every-12-share basis. With the rights issue, our ROE forecast will be diluted down to 10.7% from 11.0% currently. This leads to a fair P/BV of 1.1x or RM8.70/share, still a decent upside from the current level. Our book value is RM7.96/share with the rights issue, not much lower than the current projected RM8.09/share.

- We are positive that there is now a better picture of the potential size of RHB Cap’s rights issue, which may now be much less than our earlier preliminary estimates. The stock is now trading at less than 1x forward P/BV for FY15x, which is too low to resist, in our view. We are therefore upgrading our rating to BUY.

Source: AmeSecurities