News

CIMB,  MBSB  and  RHB  Cap  announced merger struc ture and valuations  basis .

RHB  Cap  will  acquire  CIMB  assets  and  liabilities  for  shares while  CIMB  Islamic  will  acquire  MBSB  and  RHB  Islamic  for shares  (MBSB  shareholders  has  option  for  cash)  to  merged into a mega Islamic bank with 55-58% owned by the enlarged entity (CR) post strategic shareholder(s).

CIMB and MBSB will be delisted after capital distribution.

CIMB  valued  at  RM7.267  (1.7x  P/B  1HFY13),  RHB  Cap  at RM10.028  (1.44x) and MBSB at RM2.82 (1.9x).

Completion  expected in mid-2015.

Rationale 

CIMB  conference  call:  1)  larger  scale,  top  5  in  Asean;  2) value  creation  through  synergy;  3)  EPS  accretion  while synergy  will  recover  initial  ROE  dilution;  4)  reduce  exposure to  Indonesia;  and  5)  Islamic  bank  new  growth  driver.   Postmerger  CET1  at  9%  but  target  to  increase  to  9.5%  from assets rationalization while long-term  target is 10%.

Comment 

Merger  valuation  for  CIMB  and  RHB  Cap  in  line  with expectations but MBSB surprised on upside.

Key  challenge  to  extract  synergy  and  long-term  ROE enhancement  is  addressing  the  huge  overlaps  within  CIMB and  RHB  Cap  and  to  certain  extend  with  MBSB   as  well  as execution of integration.

Although  create  scale  and  formidable  regional  banking  group with  Islamic  operation  the  new  driver,  short -term  pain  in terms of ROE dilution, integration  cost and the  overlaps.

Impact on stocks

MBSB biggest winner as deal is a privatization at significantly higher  price  (RM2.82)  vs.  current  market  price  (RM2.37)  or +19% different.

Neutral  on  CIMB,  valued  at  near  current  market  price although  will  become  stronger  entity  domestically  and regionally   longer  term.

Positive  to  RHB  Cap,  set  new  valuation  benchmark  vs. current  undervaluation.   At  RM10.028,  back -of-envelope preliminary  proforma  FY15  P/E  and  P/B  undemanding at 11x and  1.1x,  respectively,  although  ROE will drop to high single digit.

Thus,  we  are  maintaining  our  BUY  rating  on  RHB  Cap  with unchanged  target  price  of  RM10.00  and  HOLD  rating  on CIMB  with unchanged  target price of RM7.22.

OSK still relatively good proxy to RHB Cap  as estimated 10% discount  to  SOP  is   RM2.63.   However,  yesterday’s  share price  appreciation  has  reduced  the  difference  with  market price to 15%.

Risks 

Integration  execution  could  drag  earnings,  synergy  and  long term  ROE  enhancement.   However,  CIMB  confident  given experiences  in integrating  SBB and Bank Bumi.

Source: Hong Leong Investment Bank Research - 10 Oct 2014