- We maintain our HOLD rating on Hong Leong Bank Bhd (HLBB) with a unchanged fair value of RM13.70/share, assuming a rights issue of RM2.9bil. This leads to a fullydiluted ROE of 11.7% for FY16F, and an unchanged fair P/BV of 1.4x for FY16F.
- HLBB had earlier announced that it is acquiring DC Tower Sdn. Bhd. (DCT) for RM189.3mil. DCT is a property investment company holding the development and ownership rights of a partially completed 33-storey stratified office building located within the integrated development project known as Damansara City Kuala Lumpur. The vendor is Hong Leong Real Estate Holdings Sdn. Bhd.
- HLBB has clarified that the purchase consideration is at the fair value of DCT, and it has taken the market value of the building upon completion (which includes development costs) into consideration (i.e. the estimated “book value” of DCT on the completion date). Therefore, there is no goodwill arising from acquisition of DCT, in terms of impact to HLBB’s balance sheet.
- HLBB affirmed there will be no significant impact to the group’s capital ratios.
- In terms of impact to the bank level entity CET1 ratio due to investment cost in accordance with the regulator’s existing phase-in arrangements, the impact is about 8bps to its proforma March 2015 capital position.
- However, the company indicated that the acquisition of the office building was taken into consideration in its long-term capital planning strategy.
- We have changed our earnings model given confirmation there is no goodwill arising from acquisition of DCT. Recall that we had earlier imputed a goodwill of RM151mil, based on DCT’s net book value of RM38.2mil as at 31 March 2015, and the purchase consideration of RM189.3mil.
- We are leaving our rights issue assumption unchanged at RM2.9bil. This is because the rights issue is close to the RM2.8bil that we had earlier estimated, based on the latest quarter’s fully loaded bank CET1 ratio of 7.72% in 3QFY15. To recap, this had implied a potential rights issue of up to RM2.8bil.
- The latest feedback is positive in terms of better clarification on the capital position of the group. We maintain our HOLD rating.
Source: AmeSecurities Research - 7 Jul 2015
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