News

• CIMB, RHB Cap and MBSB announced that they have aborted and ceased merger negotiations on the proposed merger in view of current economic conditions.

Rationale

• Due to change in the economic conditions, the parties were not able to arrive at a value enhancing proposal.

Comment

• As we have highlighted previously, the 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.
• In view of the recent developments on the economic front, we believe it will take longer time and more challenging to achieve the above goals and hence, the abortion of the deal.

Impact on: RHB Cap

• RHB Cap – Slightly negative mainly due to reversal of the previous merger valuation which was significantly higher than the market price when details of the deal were first announced. This would be partly offset by elimination of concerns about immediate ROE dilution post -merger.
• However, we remained positive about RHB Cap given that current valuation still place the group as one of the cheapest banking group domestically while earnings have been in line with HLIB and street expectations with sustained strong underlying trends.
• Thus, maintain BUY on RHB Cap but with lower target price of RM9.28 (Gordon Growth with ROE of 11.9% and WACC of 10.8% or 1.2x FY15 P/B).

Impact on: CIMB

• Positives on CIMB given absence of concerns about ROEdilution. As share price has rebounded strongly from recent low on news and ahead of the announcement on dea l abortion, the focus will return to the potential impact from asset quality in Indonesia.
• While 4QFY14 results (announcement in Feb 15) could remain weak from the above issue, fundamentals of Indonesia are improving. Premised on previous guidance of asset quality issue bottoming in 4Q14 or 1Q15 (pending update next week during a small group meeting), it could be a catalyst if the situation stabilized.
• Thus, maintain Trading BUY on CIMB but with lower target price of RM6.63 (Gordon Growth with ROE of 12.4% and WACC of 10.3% or 1.4x FY15 P/B) as we updated the latest adjusted Beta.

Impact on: MBSB

• Negative for MBSB as the privatization price of RM2.82 no longer valid. However, as share price has reacted ahead of the news and below the level when details of the deal were first announced, unlikely to see significant negative reaction, especially when it will remain a potential take-over target.

Impact on: OSK

• Negative on OSK but share price also lower than the levelwhen details of the deal were first announced. With reduced target price for RHB Cap, estimate 10% discount to SOP is now RM2.19.

Source: Hong Leong Investment Bank Research - 15 Jan 2015