News    BIMB Holdings Bhd (“BIMB”) proposes to acquire the remaining 49% stake in Bank Islam Malaysia Bhd it does not currently own (“Bank Islam”) for a total consideration of USD884.6m or RM2.83b (assuming USD1.00 = RM3.20). 

BIMB will pay Dubai Financial Group LLC (“DFG”) a cash consideration of USD550m or RM1.76b for 30.47% stake and Lembaga Tabung Haji (“LTH”) another cash consideration of USD334.6m or RM1.07b for a 18.53%-stake.

At the same time, BIMB also proposes renounceable right issue of 426.72m new ordinary shares of RM1.00 each (“rights”), together with 426.72m free detachable warrants (“warrants”) on the basis of 2 rights shares and 2 warrants for every 5 existing BIMB shares at an indicative issue price of RM3.60/rights share to raise total indicative gross proceeds of ≈RM1.54b. We understand that the warrants have an indicative exercise price of ≈RM4.00 each.

BIMB also proposes to issue a 10-year Sukuk of up to RM2.2b in nominal value to raise an indicative gross proceed of up to ≈RM1.47B. 

Comments    We are positive on this development as it could further enhance BIMB’s profitability despite the larger share base and higher cost of funding post acquisition (see overleaf for details).

Based on our estimated pro-forma financial statements, the acquisition of the 49% minority stake in Bank Islam will instantly boost BIMB’s net profit by 81.3%, using FY12 number as a benchmark. Based on our estimates, minority interests in Bank Islam are estimated to account for approximately 83.7% of the total minority interest of BIMB of RM243.54m in FY12. However, this acquisition will automatically drain  its liquidity by RM2.83b, hence the need for fund raising, and generate RM1.28b goodwill.

Post completion of both acquisition and fund raising, we could see marginal impact (≈5.7% reduction in Total Income based on a pro-forma projection from FY12 results) to BIMB’s top-lines due to higher funding expense arising from the issuance of Sukuk. Note that we have assumed a funding cost of 5.5% to its nominal value.  

Nevertheless, the projected EPS is likely to see a 7.8% improvement even with BIMB’s share base expanding from 1.07b to 1.49b, a 40% increase. Post rights issue, its book value per share (“BPS”) will also see improvement of 25.7% to RM2.38/share (from RM1.89 in FY12) while NTA/share is expected to be diluted (by 19.5%) to RM1.52 from RM1.89. 

While these corporate exercises will not cause any impact to Bank Islam’s capital adequacy position, they will effectively increase BIMB’s gross leverage ratio by a manageable 16.4%, hence a better projected ROE of 13.6% in contrast to 13.1% in FY12.

Outlook    In term of business operations, we still expect Bank Islam to achieve a higher financing growth target of 15% YoY by end-FY13 (1Q13: 37%) with a Financing-to-Deposit ratio of 57%.

Its higher than the industry financing growth rate of 10.4% will mainly come from its financing of ETPrelated projects. We still expect Bank Islam to deliver a faster balance sheet growth from corporate lending and achieve a better asset quality similar to its peers in 2-3 years time.  

Forecast   No changes in our FY13-FY14 earnings forecasts at this juncture pending further details from the management. 

Rating   Maintain OUTPERFORM

Valuation    As the share price has marginally surpassed our earlier target price of RM4.10 and given that we expect to see a potential 7.8% enhancement in its EPS and 25.7% in its BPS, we have revised up our Target Price to RM4.42 (+7.8%), pending updates from the management.

The valuation is reasonable as it represents 1.9x PBV to our existing FY14 BPS of RM2.27 (or FY12 proforma BPS of RM2.38). 1.9x PBV also implies 1SD above its 4-quarter PBV average. Recall that its average PBV valuation was re-rated to 1.6x in the past 4 quarters from 1.2x a year ago.

Risks    Tighter lending rules and a margin squeeze. 

Source: Kenanga