Highlights

Salient points from yesterday’s analyst briefing on the acquisition of Hwang Investment (which was completed on 7 Apr) whereby customer and single platform Day 1 will be in 3Q14 and 4Q15, respectively.

Management reiterated the rationale of the acquisition whereby businesses of the two parties are complementary, strengthen the IB value proposition and synergistic benefits.

It also provided some guidance on synergies which is broken into revenue, cost and transformative. The latter is a 5-year strategic vision to take the business to the next level, leveraging on its customer base.

For FY15-17, PBT is expected to be boosted by RM84m (RM32m revenue, RM79m cost and –RM25m “dissynergies” or overlapping business especially in the institutional broking space). However, given the integration cost of RM54m (spread over 12-18 months), we believe any benefits over the next 12-18 months will be mitigated. Management also guided that it will only hit a stable stage in FY18 with synergies of RM43m per annum (RM15m revenue, RM36m cost and RM8m “dis-synergies”).

We reiterate that we are neutral on the M&A. On the positive side, we do acknowledge that the acquisition is complementary with potential synergies. However, we believe this will be negated by dilution to EPS, ROE and capital ratios (arising from the planned RM1.25bn rights issue which is scheduled to complete in 2Q) in the interim before full synergies filter through.

Moreover, given that its share price has depreciated by 8.3% since the announcement of acquisition details, our initial EPS dilution estimate of 18% could be larger.

Risks

Unexpected jump in impaired loans, lower than expected loan growth and intense competition from much bigger players.

Forecasts

Unchanged.

Rating

HOLD

Positives - Improving asset quality and profitability; CET1 equal to Tier-1; and Potential M&A excitement as it is one of the two remaining smallest banks with assets size of circa RM60bn (less than half of the next largest bank, AMMB).

Negatives - Investors’ perception and delinquency track record as well as one of the lowest NIM, ROE and deposit franchise (CASA only 21% of total) but highest percentage of fixed rate loans among peers.

Valuation

Target price maintained at RM4.26 based on Gordon Growth with ROE at 10% and WACC at 10.8%. Although potential return is now more than 10%, we are keeping our Hold rating on the stock as potential of a larger-thanexpected dilution from the planned rights issue is likely to hog price performance.

Source: Hong Leong Investment Bank Research - 9 Apr 2014