Bursa Securities (Bursa) had rejected the application for a waiver for the EPF from complying  with related party transaction requirements  under the listing rules of Bursa in respect of its rights to vote on the resolutions to  approve  the  proposed  M&A  exercise  involving  RHB  Capital,  CIMB and  MBSB  at  an  upcoming  EGM  to  be  convened.  Bursa  cited  the following  considerations  for  rejection:-  i)  the  governance  of  conflict  of interest  –  EPF being a related party in the deal has been able to  assert its influence over the proposal to its own benefit; ii) EPF’s position is not the same as the other shareholders of RHB Capital  – holding controlling stakes in both RHBCap  (41.5%) and MBSB (64.5%) to exert significant influence  and  meanwhile,  has  prior  knowledge  of  the  proposal  (being notified by CIMB Group before the issuance of the letter of intent on 9 July 2014). (Source: Bursa Malaysia)

Comment: We have anticipated the outcome of Bursa’s decision to bar the EPF from exercising its vote in an upcoming EGM (to be convened). As  a  result  of  this,  Aabar  Investments,  who  currently  holds  21.9%  of RHBCap,  will  see  its  voting  rights  increase  to  37.4%  while  OSK Holding’s  voting  rights  increase  from  9.9%  to  16.9%.  Assuming  that Aabar  is  not  in  favor  of  the  deal,  it  will  become  a  challenge  for  the proposal  to  go  through,  unless  the  minority  shareholders  and  OSK Holdings are highly in favour of the deal.

From our view, it will be an arduous task to achieve a shareholders’ vote of  50%  (which  is  the  minimal  requirement)  given  that  the  anticipated value creation of the merger remains questionable. As MBSB’s assets will  ultimately  be  incorporated  into  RHBCapital  (under  the  Islamic Banking unit of CIMB Islamic), this will also result in higher risk weights requirement, which in turn may need higher capital. RHBCap, which has yet  to  address  its  double-leverage  issue  (currently  at  135%),  may  be required to raise further equity capital in order to lower it to 120%. The share  prices  of  RHBCap  and  MBSB  may  see  some  negative  reaction today,  but  we  do  not  expect  a  massive  selloff  on  the  stocks  due  to recent pullbacks.

On  the  other  hand,  based  on  a  StarBiz  report,  EPF  may  look  into disposing its 14.59% stake in CIMB Group to another GLC institution in order to resolve the issue of conflict of interest. Should this happen, we believe that the deal may ultimately go through given its 41.5% stake in RHBCap.

Our  recommendation  remains  unchanged  –  RHB Capital  (REDUCE, RM8.52,  PT  RM7.50  @  FY15  P/BV  target  of  1.0x);  MBSB  (ADD, RM2.60,  PT  RM2.60  @  FY15  P/BV  target  of  1.4x);  CIMB  (Under Review, RM6.41, PT RM6.63 @ FY15 P/BV target of 1.38x).

Source: Affin Hwang Capital Research - 23 Oct 2014