- We downgrade our rating on Hong Leong Bank Bhd (HLBB) to HOLD from BUY, with a lower fair value of RM14.30/share (vs. RM17.00/share earlier).
- We have rolled forward our base year to FY16F from FY15F, and at the same time, assumed the impact of a rights issue of RM2.3bil. This leads to an estimated fullydiluted ROE of 11.9% for FY16F (previously 14.1% FY15F) and a lower fair P/BV of 1.5x FY16F (previously 1.9x FY15F).
- Based on HLBB’s latest fully-loaded bank CET1 ratio, we estimate the potential rights issue to be around RM2.3bil, involving a possible 1-for-9 basis rights issue, assuming the rights issue is priced at about 20% discount to the market price, or RM11.20/rights share.
- At our recent company visit, the company continues to affirm that there are no plans to utilise its treasury shares to reduce the size of its potential capital raising later. The company reiterated that these treasury shares are to be set aside for general buffer purposes.
- Recall that we had estimated earlier that these 81.1mil treasury shares to be worth RM1.15bil, which is essentially a hidden capital buffer. We estimate the potential rights issue to be reduced by more than half, to RM1.2bil. A reduced rights issue would have lifted the fair value to RM15.10/share, which provides a decent upside from the ex-rights price of RM13.80/share.
- The uplift in fair value is on the back of higher book value of RM10.29/share (compared to RM9.29/share without any utilisation of rights issue) arising from the gain of sale of treasury shares, which will essentially help to compensate for the dilution in ROE.
- Given further affirmations that treasury shares are unlikely to be utilised to reduce the potential rights issue, we think there will likely to be some disappointment in the market. We downgrade our rating to HOLD.
- We also expect ongoing slow revenue growth, although this should be viewed positively in the longer term as it indicates continuing higher level of standards set internally. We expect share price to hold, as asset quality is likely to continue to be excellent.
Source: AmeSecurities Research - 15 May 2015
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