• To acquire a piece of land measuring 54,266 sq ft in Tun Razak Exchange (TRX) for RM255m.

• The land has been earmark for an international class Grade A 35-storey office building with 830 parking bays. It has a plot ratio of 15.2x or gross floor area (GFA) of 823,439 sq ft.

• Price per GFA is RM309.67 and is a 2.3% discount to current market value as appraised by independent valuer.

• It plans to develop the land into its own Head Office to cater to the future expansion of the group. Financial impact

• Acquisition consideration was only 0.4% of total asset while affordability is not an issue for a financial institution.

Pros / Cons

• The acquisition price is on the high side given that on a psf basis, it is priced at RM4,699 vs. recent transaction of: 1) MRCB acquisition of German Embassy land at RM3,182 in Apr 15; 2) LTH acquisition of land in TRX for RM2,780 in May 15; and 3) Mulia Group acquisition of land in TRX for RM4,490 in May 15.

• When compared with price per GFA, RM309.67 is also higher than LTH’s transaction of RM264.94 albeit the LTH land has a lower plot ratio of 10.47x.

• Meanwhile, identity of the valuer was not revealed.

• While financial impact is limited, high acquisition price could raise concerns among investors, especially amid current low investors’ sentiment.

Risks

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

Forecasts

• Unchanged.

Rating

HOLD

Positives

• Tier-1 capital purely equity while acquisition of Hwang enhanced its market share in broking; and
• Potential M&A excitement given that it is one of the two remaining smallest banks with assets size of circa half of the next largest bank, AMMB.

Negatives

• Investors’ perception and its delinquency track record;
• One of the lowest NIM, lowest ROE, weak deposit franchise (CASA only circa 20% of total ) and high fixed rate loans; and
• Short-term drag and dilution from acquisition of Hwang.

Valuation

• Maintain Hold but with lower target price of RM2.93 based on 20% discount to Gordon Growth (ROE at 8.1% and WACC at 9.4%) in view of potential concerns about governance and the qoq increase in impaired loans ratio.

Source: Hong Leong Investment Bank Research - 11 Aug 2015