News

• CIMB,  MBSB  and RHB Cap  will be suspended today pending material announcement.

Comment 

We  take  the suspensions as strong signal that all parties are proceeding  with  the  merger  especially  with  pending  material announcement,  otherwise,  they  could  have  easily announcing  the abortion  of the deal.

In  view  of  the  complexity  and  three  entities  involved,  the parties  may  not  be  able  to  announce a definitive structure for the  merger  but  may  announce  that  they  need  more  time  to finalise the structure and details of the mega merger. Valuation Yardstick

Given  2014  P/B  differences  (CIMB:  1.6x,  MBSB  consensus: 1.5x  and RHB Cap: 1.2x), we believe  the merger will likely be via  share  swap  (with  some  element  of  cash)  and  likely to be in  the  range  of  1. 4-1.6x  (1.5-1.6x  for  CIMB  and  MBSB  and 1.4-1.5x  for  RHB  Cap  vis-à-vis  EON  Bank’s  1.4x  via  an  all cash acquisition).

Stocks To Focus

We  believe  it  is  irrelevant  who  will  end  up  as  the  acquirer given  that  the  deal  is  a  merger  of  three  entities  and  likely to involve  majority  share  swap.   Based  on  the  market capitalization  and  asset  size  of  the  parties  involved,  CIMB shareholders  will likely end up leading  the enlarged  entity.

Given  our  base  case  merger  valuation  of  1.4-1.6x  P/B  and current  valuations  of  the  individual  entities,  we  believe  the best  proxy  to  this  merger  is  RHB  Cap  (Buy;  TP:  RM10.00) given  that  it  is  only  trading  at  1.2x  P/B.   Our target price for RHB  Cap  is  pegged  at  1.4x  P/B  or the  lower end of an  M&A valuation  situation.      

OSK  is a cheaper proxy to RHB Cap  as its stake in the latter is  already  worth  RM2.27  vs.  current  share  price  of  RM2.07. We  estimate  that  based  on  HLIB’s  target  price  of  RM10.00 for  RHB  Cap,  OSK  could  be  valued  at  (after  10%  holding company discount) RM2.63, if RHB Cap is valued at 1.5x P/B (RM10.72),  OSK’s  valuation  (after  10%  holding  c ompany discount) could hit RM2.80.

We  remained  neutral  on  CIMB  and  retain  our  Hold  call  with unchanged  target price of RM7. 22.

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 - 9 Oct 2014