News

Fixed rights issue price at RM2.76 at entitlement basis of 3 rights shares for every 10 existing shares.

Rights price is at 20% discount to theoretical ex-rights price of RM3.45 based on 5-day VWAP of RMRM3.66.

This will involve issuance of 448.37m new shares which will raise RM1,237.51m.

Financial impact

Recall that this rights issue is to fund the acquisition of Hwang IB.

Following the rights issue details and post results announcement (note that the deal was announced before the release of its FY13 results), our latest estimation shows that (post acquisition and rights issue), EPS will be diluted by 14%.

ROE will be reduced by circa 40bps while Tier-1 capital circa 55bbps.

Our Gordon Growth TP would be reduced from RM3.86 to RM3.45 rather than theoretical ex of RM3.65 due to ROE dilution.

Pros / Cons

We reiterate our neutral stance on the deal. The acquisition of Hwang IB is expected to provide synergies but due to integration cost, 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.

Although the merger would provide complementary businesses (assuming no attrition), potential synergies (over the longer term) will be negated by immediate dilution to EPS, ROE and capital ratios (from the rights issue).

Risks

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

Forecasts

Unchanged pending finalization of deal and rights issue.

Rating

HOLD

Positives

• Improving asset quality, profitability and Tier-1 capital purely equity;
• Potential M&A excitement given that it is one of the two remaining smallest banks with assets size of circa RM50bn (less than half of the next largest bank, AMMB).

Negatives:

• Investors’ perception and its delinquency track record.
• One of the lowest NIM among peers, lowest ROE in industry, low deposit franchise (CASA only 21% of total) and one of the highest percentage of fixed rate loans.

Valuation

Target price maintained at RM3.86 based on Gordon Growth with ROE at 9.2% and WACC at 10.3%.

Source: Hong Leong Investment Bank Research - 26 May 2014