News

Proposed rights issue to raise up to RM5bn. Entitlement basis and issue price (discount of 20-35% to theoretical exrights price based on 5-day volume weighted average price immediately preceding the price fixing date) will be determined later.

Tan Sri Dato’ Teh Hong Piow who collectively owned 24.1% has given irrevocable written undertaking to subscribe in full its entitlement.

Financial impact

For illustration purpose, assuming 27% discount (issue price) or RM14.20, this will involve a rights issue of circa 1- for-10 or about 350.2m rights shares.

CET1 of 8.5% as at Mar 14 will improve by 140bps to circa 9.9%, closer to peers.

Book value will increase by circa 13%.

However, EPS and ROE will be diluted by about 6% and 16% (assuming proceeds will yield 4%) with the latter dropping to 17% (from 20%).

Pros / Cons

We are neutral to slightly positive about the rights issue.

Despite the EPS and ROE dilution, its capital ratio (which is among lowest vis-à-vis peers) will be boosted to a level that is comparable to peers.

More importantly, it will eliminate uncertainties about the timing of a cash call and its capital position.

We also believe that this is an opportune time to undertake such exercise given that its share price is riding high which will help to minimize the EPS dilution impact.

However, given that current share price has already largely reflect its fundamentals, we still prefer Maybank and RHB Cap for exposure to the banking sector.

Risks

Unexpected jump in impaired loans, lower than expected loan growth and higher than expected erosion in NIM.

Forecasts

Unchanged pending details of the rights issue.

Rating

HOLD

Positives:

• Above industry asset quality and ROE;
• Excellent track record in delivering guidance and consistency in growth.

Negatives:

• Dividend payout ratio lower than previous years and uncertainty about quantum of counter cyclical buffer.

Valuation

Maintain target price at RM19.08 based on Gordon Growth with ROE of 20% and WACC of 8.8%, pending details of the rights issue.

Source: Hong Leong Investment Bank Research - 30 Apr 2014