CIMB Group Berhad (CIMB) announced that it has acquired 60% of Bank of Commerce ('BoC') from the San Miguel Corporation ('SMC') for PHP12.2b (RM881m) with a full cash settlement.  BoC is valued at a 1.14x P/Bv as at 31 Dec 2011 or a PER of 21.0x; but upon full alignment with CIMB Group's accounting standards, the effective  P/Bv  is  expected  to  rise  to  about  1.3x.    We  believe  BoC's low loan-to-deposit ratio of 45% and high CAR ratio of 23.1%, is under-leveraged and offer a high growth potential for CIMB to enter into the Philippines.  Besides, CIMB signs a Collaboration Agreement with SMC, one of the largest conglomerates, as banking referrals.  As such, we believe the acquisition is earning accretive over the medium to long term.  More importantly, this will give CIMB a full ASEAN banking coverage.  Together with the RBS's IB Asset acquisition, the group is positioning itself for the next Asia's recovery cycle, in our view.  We maintain our forecast for now. As such, our target price of RM8.50 and OUTPERFORM call are maintained. Currently, CIMB's share price is trading at 13.2x FY12 EPS, which is not demanding as compared to its 3-year historical mean of 15.7x and just marginally above its low in 2009 of 12.6x.  

The BoC acquisition.  CIMB has entered into a Sale and Purchase Agreement with SMC on 8 May 2012 for the acquisition of 60% of BoC for a total cash consideration of PHP12.2b (or equivalent to approximately RM881m).   The deal also include including the  signing of a Collaboration Agreement with SMC for banking referrals into SMC eco-system.  The effective Price to Book ratio of the transaction is 1.3x after realignment of accounting standards. Management expects a 3-4 months consolidation for 2012 and to complete the acquisition by Sep 2012.

Operational and strategically right fit.  The deal will see CIMB entering into the low-penetration Philippines's banking market on a smaller scale basis. BoC is the 16^th  largest bank in Philippines and has been in a 'cleanup'  mode  over  the  last  few  years.    BoC's  reported  PAT  of  RM42m  in  2011, with the purchase price of RM881m, the acquisition PER is >20x.  However, the bank is under-leveraged with high a growth potential as proven by its low LDR and high CAR.  The collaboration with SMC will enable BoC to continue to access into SMC's ecosystem and to tap into a sizeable SMC-related entities as well as suppliers and customers. These will enable BoC to grow its corporate loan book aggressively over the immediate term.

CIMB's  management  is  eyeing  to  build  BoC  to  become  one  of  the  top  ten banks in Philippines by immediately growing its corporate loans. This is achievable through CIMB's strength in deriving synergy out of the acquisition and collaboration with SMC. Post acquisition, SMC will still retain a 27% stake in BoC.

We are positive on the deal given that the acquisition will not only provide CIMB an entry into Philippines but more importantly, it has reaffirmed CIMB as an ASEAN-based bank with the largest branch network.  

Source: Kenanga