News

CIMB, MBSB and RHB Cap obtained BNM’s green light (for six months) to commence merger negotiations, including creation of a mega Islamic bank together with MBSB.

All parties entered into 90-day exclusive agreement to negotiate and finalise pricing, structure and other terms. All consideration used to effect the merger shall be referenced to the closing prices on 9 Jul. We gathered that this statement is to set the starting point in pricing negotiation and should not be taken as the final consideration prices.

Comment

The merger will create the largest banking group in the country (in terms of total assets), surpassing Maybank.

We see potential synergy via economies of scales and streamlining shared services in the longer term but similar to other merger, there will be drag in the short-term due to duplications, integration cost and time as well as impact of share issuance on ROE.

Merger also provide opportunity to resolve RHB Cap’s tight holding (low liquidity), EPF’s large stakes in MBSB and RHB Cap, trapped values in OSK and strengthen shareholding structure of the new entity.

Valuation Yardstick

Given 2014 P/B differences (CIMB: 1.6x, MBSB consensus: 1.5x and RHB Cap: 1.2x) and for Aabar’s (who owns 21.6% of RHB Cap with entry cost in 2008 of RM10.80, which implies 1.51x) buy-in, the merger (rather than acquisition) will likely be via share swap (with some element of cash) and likely to be in the range of 1.5-1.6x (vs. EON Bank’s 1.4x via an all cash acquisition). We believe 1.5x is more palatable to Aabar and all stakeholders vis-à-vis the failed attempt back in 2011 when the purported Aabar’s asking price was at 2x (although both worked out to be about the same share price).

Stocks To Focus

Given RHB Cap’s low P/B valuation, this news is expected to excite share price performance. Thus, we are maintaining our Buy call with unchanged target price of RM9.59.

OSK is a cheaper proxy to RHB Cap as its stake in the latter is already worth RM2.27. We estimate that based on RHB Cap’s prices of RM8.72 (last close), RM9.59 (HLIB’s target price) and RM10.72 (at 1.5x FY14 P/B), OSK could be valued at (after 10% holding company discount) RM2.33, RM2.53 and RM2.80, respectively (Figure #2).

We remained neutral on CIMB and retain our Hold call with unchanged target price of RM7.74.

The news may also prompt interests on M&A among other banks. Potential candidates are: 1) AFG (which is among the smallest bank and with high asset quality and capital ratio, albeit P/B valuation already higher than the above mentioned companies); 2) BIMB, but we believe it will be an acquirer given that a merger into a conventional banking group would result in BIMB losing its unique states as a SC Shariah compliant financial institution. Potential target is Bank Muamalat (given that DRB has the intention to pare down its stake as part of regulatory requirement).

Risks

If the deal falls through, share prices of related stocks could retrace while excitement on other potential M&As could also subside.

Source: Hong Leong Investment Bank Research - 11 Jul 2014