- We maintain HOLD on RHB Capital Bhd (RHB Cap), with an unchanged fair value of RM8.30/share. Our fair value is based on a new ROE of 11.5% for the new RHB Bank which will take over RHB Cap’s status. This leads to a new fair P/BV of 1.25x, but on a lower book value of RM5.12/share.

- RHB Capital’s (RHB Cap) internal restructuring will essentially involve the streamlining of RHB Cap Group’s businesses under RHB Bank.

- We estimate that RHB Cap shareholders are entitled to 1.29 RHB Bank shares for every 1 RHB Cap share, as RHB Bank shares will be distributed to RHB Capital’s shareholders on an entitlement basis post the rights issue.

- RHB Bank’s book value post rights and restructuring is RM4.60/share for FY14F – almost half of RHB Cap’s RM7.09/share (proforma with rights for FY14).

- We forecast RHB Bank’s book value at RM5.12/share for FY15F. This is also almost half of our projected book value for RHB Cap of RM8.09/share for FY15F.

- Given the lower equity base, as well as adjustments to our net earnings from interest savings, we estimate a better ROE of 11.5% for the new RHB Bank vehicle. In contrast, our ROE forecast for RHB Cap was 10.5% post rights for FY15F.

- Thus, based on RHB Bank’s new ROE of 11.5%, and the new book value of RM5.12/share, we peg the fair value at RM6.40 for the new RHB Bank, based on a fair P/BV of 1.25x.

- Given that each RHB Cap share is entitled to 1.29 RHB Bank shares, we have apportioned our fair value accordingly for RHB Bank to arrive at RM8.30/share for every RHB Cap share held currently.

- Furthermore, we estimate that RHB Cap’s ex-rights price to be about RM7.85/share.

- Thus, there is still a limited 5.7% upside to our fair value of RM8.30/RHB Cap share.

- All in, the better ROE for the new RHB Bank vehicle is essentially knocked down by a lower book value base. Shareholders of RHB Cap is estimated to be entitled to 1.29 RHB Bank shares, with a fair value of RM6.40/RHB Bank share. We maintain HOLD. 

Source: AmeSecurities Research - 15 Apr 2015