News It was announced that MBSB proposes to undertake the following:-

- A renounceable rights issue of new MBSB Shares (Rights Shares) to raise maximum gross proceeds of up to RM1.47b (Proposed Rights Issue); and  

- A dividend reinvestment plan that gives shareholders of MBSB the option to elect to reinvest their dividend entitlements (representing cash dividends declared by MBSB including interim, final, special or any other cash dividends in new MBSB Shares (Proposed DRP).

However, the entitlement basis for the Proposed Rights Issue (Entitlement Basis) and the issue price for the Rights Shares (Issue Price) have not been fixed at this juncture. Also note that the Proposed Rights Issue is intended to be undertaken on a full subscription basis. EPF which has undertaken to subscribe in full for its entitlement under the Proposed Rights Shares (Undertaking), is subject to a minimum of 20% discount to the Theoretical Ex-Rights Price (TERP) based on the five (5) days volume weighted average market price up to the date preceding the announcement of the entitlement date.

Comments  The move has been long anticipated.

 Recall that early in the year, we have highlighted that MBSB needs new capital management plan to address its relatively low core capital ratio of 6.3% as at end-December 2012. In fact, back then, the management has indicated a potential capital raising exercise of up to c.RM3b-RM4b, which is to be done in stages and might involve issuance of rights shares and DRP.

 As at end-December 2012, the Group’s total shareholders fund only stood at RM1.5b. Assuming if the Group manages to raise the maximum amount of capital, it will instantly double its core capital ratio to >12%.

 Nonetheless, such Proposed Rights Issue should see some degrees of EPS dilution in a trade-off with strengthened book value.

 And, to satisfy the above-mentioned conditions i.e. (i) capital raising of RM1.47b and (ii) subscription price of minimum 20% discount to TERP, we believe the potential Entitlement Ratio could be fixed at in the range of 0.4-0.5 and, at the same time, with a price discount of ≈25%-30% in order to achieve the maximum capital raising of RM1.47b.

Outlook  While the Rights Issue may dilute its EPS and ROE (but strengthening its book value), we are not entirely concerned as those capital is required to sustain its balance sheet growth story.

 Hence, we believe the Group is able to meet its revenue growth KPI of 25.0%. As for its KPI to

meet a net return on equity of 15.0%, this may not be a concern as well. This is because even with a doubling in shareholders funds, its ROE will only be reduced by 1/3, translating into >20% given its latest annualised ROE of >35%.

Forecast  We maintain our forecasts pending the fixing of Entitlement Basis and Issue Price of the rights issue.

 Our FY13 and FY14 net earnings estimates are maintained at RM596.8 (+33.6% YoY) and RM673.2m (+12.8%), respectively.

 Rating    Maintain OUTPERFORM

 Valuation  We also maintain our TP of RM3.40, representing a FY14 PER of 8.8x or a FY14 PBV of 2.5x (which is at the +0.5SD to 3-year PBV average).

Risks to Our Call  Potential tighter regulations by the central bank.

 Lower repayment ability should disposable income of borrowers are eroded by higher living cost arising from subsidies cut. 

Source: Kenanga