News

Reuters reported that EPF is considering taking RHB Cap private. It will subsequently merge with MBSB and later relist the merged entity.

Financial impact

None.

Pros / Cons

Talks of privatization and/or merger with MBSB (the latter due to common shareholder) are not new and have been resurfacing for some time now.

Any privatization is likely to involve an offer price which is much higher than current market price to ensure success (especially after several recent failed privatization efforts). This will be a bonus to other minority shareholders. Moreover, market may be excited by the fact that Aabar (its second largest shareholder)’s entry cost is RM10.80. Even if we assumed that Aabar received the full FY11 and DY12 dividend totaled 45.5 sen, its net cost is RM10.35.

Moreover, one of the reasons for RHB Cap’s lagging valuations (vs. peers) could be concerns about a merger with MBSB which would increase its impaired loans and dilute its capital ratio. The privatization alternative is likely to be better received by the market.

Regardless of whether the latest talks would materialize, we believe investors should focus on the fundamentals as well as the valuations gap vis-à-vis peers.

Although the company reported a poor 1QFY13 results, it was due to seasonality, one-off RM76m provision and timing mismatch in OSK cost and revenue. With strong deal and loans pipeline, more active capital markets post the 13th General Election and more merger (with OSK) synergistic benefit in subsequent quarters, we believe results will be improving.

Hence, we firmly believe that the valuation gap with peers will narrow which means opportune time to accumulate. Privatization will only expedite it. Our conviction is premised on its cheap valuations (on both “as it” and return adjusted basis).

Risks

Unexpected jump in impaired loans and lower than expected loan growth as well as impact from Basel III.

Forecasts

Unchanged.

Rating

BUY

Positives - Valuations still lagging behind peers; transformation bearing fruits with expanding regional footprint, reflected in strong loan growth and improving asset quality; “Easy” contributing to higher market share in retail segment; and tie-up with Pos M’sia.

Negatives - Lack of liquidity and short term dilution from the acquisitions of OSK and potentially Mestika.

Valuation

Target price maintained at RM10.08 based on Gordon Growth with ROE of 12.4% and WACC of 10.3%.

Source: Hong Leong Investment Bank Research - 24 Jun 2013