To acquire 100% Hwang IB (includes 70% Hwang IM and 49% AIIM) for RM1.36bn (RM1.088bn - Hwang IB, RM262m - Hwang IM and AIIM and RM13m - Hwang Futures) cash.  This translates to 1.28x Hwang IB P/B and 1.81% of AUM.

 Financed by RM1.4bn bridging loan but will raise RM1.25bn rights issue (we estimate 1-for-4 at 20% discount). 

Excluding acquisition cost of RM32m, we estimate that it will boost FY14 earnings by circa 2.7% but EPS will be significantly diluted (circa 17.7%) by the rights issue.

After acquisition and rights issue, ROE and Tier-1 ratio would also decline by circa 100bps and 50bps respectively. Pros / Cons

We are neutral on the deal.  The enlarged group will jump to top two broking (circa 11% market share) and top five asset management (AM) firm with RM27.9bn AUM.  Affin’s more institution centric business will be complemented by Hwang’s more retail centric operations.  

Pricing is fair as 1.28x P/B for Hwang IB is comparable to Kenanga-ECM’s 1.27x and RHB-OSK’s 1.77x (higher multiple due to OSK’s regional footprint vs. Hwang’s more domestic centric operations).  Pricing for AM is also fair at 1.81% of AUM, within recent transacted range of 0.81- 4.02%.  However, the above are mitigated by dilution in EPS, ROE and capital ratios.  

 

We believe the ultimate critical success determinants are ability and speed in extracting synergistic benefits, maintaining the enlarged remisier base (or minimized attrition rate) and minimal broking account duplication.

Unexpected jump in impaired loans, lower than expected loan growth and intense competition from larger peers.

Unchanged pending finalization, rights issue as well as integration cost and synergistic benefits guidance.

HOLD

 

Positives

Negatives:  

Target price maintained at RM4.10 based on Gordon Growth with ROE at 9.8% and WACC at 10.8%.