The Edge Malaysia Weekly carried an article that Aabar Investments PJS may  now  be  in  favour  of  the  merger  proposal  involving  CIMB-RHBCapMBSB, believing that the merger synergies will be positive. The merger, of which will create the 4th largest bank in ASEAN, will see synergies such as a wider regional presence for each entity and increased cost efficiencies. (Source: The Edge Malaysia)

Comment: In our view, Aabar’s vote plays a significant role in the voting of the merger proposal, given that the EPF, the key shareholder in RHBCap has  not  been  allowed  to  exercise  its  vote  in  an  upcoming  EGM  (to  be convened). Aabar, who holds 21.9% in RHBCap, will see its voting rights increase  to  37.4%  and  may  subsequently  influence  other  minority shareholders’  decisions  as  well.  We  anticipate  the  share  prices  of  CIMB and RHBCap to recover as a result of this new development (if turn out to be true).

Though  our  recommendations  remain  unchanged  –  CIMB  Group (REDUCE rating under review, RM6.29, PT RM6.63 @ FY15 P/BV target of  1.38x);  RHBCapital  (REDUCE,  RM8.69,  PT  RM7.50  @  FY15  P/BV target  of  1.0x);  MBSB  (ADD,  RM,  PT  RM2.60  @  FY15  P/BV  target  of 1.4x),  we  note  that  the  share  prices  of  CIMB,  RHBCap  and  MBSB  may trade higher than our price targets due to a more optimistic scenario of the merger. We also understand that the final  pricing of the share  exchange will likely be subject to revisions, depending on the latest market pricing, though the share swap ratio will remain. Key risks to the merger include: i) Aabar’s  final  decision  (of  whether  it  is  in  favour  of  the  merger);  and  ii) higher capital requirements to address the double leverage ratio.

Source: Affin Hwang Capital Research - 27 Oct 2014