Cash Company. Hwang-DBS (Malaysia) Berhad (HDBS) will become a cash-rich company (with >RM1,200m in cash after netting off RM310m for debts repayment) following several disposals of its core business and noncore assets.

To recap, HDBS has on 7 April 2014 completed the disposal of its entire equity interest in Hwang-DBS Investment Bank Berhad (HDBSIB) and its subsidiaries and associated companies to AFFIN (MP, TP: RM4.60) for a total cash consideration of RM1,300.4m. Earlier, HDBS had also disposed off Hwang-DBS Commercial Bank Plc (HCB) to Phillip MFIS Pte Ltd for a cash consideration of USD40.0m (or ≈RM131.2m) on 14 March 2014 while a parcel of land located in Ampang was sold for RM82.5m to Putrajaya Ventures Sdn Bhd on 15 January 2014. Besides, HDBS also proposes to dispose its 51%-owned research unit (HDBSV) to AFG (OP, TP: RM5.62) for a total cash consideration of RM0.4m which is expected to be completed by 2QCY14.

Going “ex” for a special dividend of RM2.50/share. Post completion of the above-mentioned disposals, HDBS has announced that part of the proceeds from these disposals will be distributed in the form of special dividend of approximately RM637.9m or RM2.50 per share to its shareholders. The “ex-date” is fixed at 21 April 2014 while the entitlement date is set at 23 April 2014. However, note that, the total amount of this special dividend payment is still far lower than its cash holding.

Obliged to maintain its listing status. We understand that HDBS is required to maintain its listing status for a period of two (2) years from the date of the Sale Purchase Agreement (SPA) signed between HDBS and AFFIN. The SPA was dated 22 January 2014.

Nonetheless, post assets disposal, HDBS’ future income stream is expected to rely substantially on its remaining subsidiaries, namely HDM Capital S/B & HDM Properties S/B. These two business segments accounted for 11.1% and 28.3% of the HDBS’ group operating revenue and group PAT, respectively, as at end-July13. HDBS has also set aside RM250.0m to pursue other potential businesses. At the same time, HDBS is also proposing to change its name to Hwang Capital (M) Bhd.

More capital repayments / special dividends in the future? In the event that HDBS is not able to identify and acquire any potential businesses in the next two years, we understand that the Board of Director of HDBS has no intention to maintain the listing status. Under such circumstance, HDBS is likely to carry out capital repayment and to go through liquidation exercise for the remaining assets and to return any net cash recoverable to the shareholders.

Strong and almost all-cash (>90%) net assets of RM5.18/share (or RM2.68/share post RM2.50 special dividend). Based on our estimate, HDBS’ net assets is estimated at RM5.18/share before the distribution of special dividend. This estimate is derived from the net asset value as at end-Jan14 of RM4.01/share plus gains on disposal of RM1.17/share. On an “ex” special dividend basis, HDBS net asset value of RM2.68/share is still higher than its ex-dividend price of RM1.90.

Deep in value, but a 2-year investment horizon is needed. While the stock could be traded at a substantial discount* before any newsflow of further capital repayment / special dividend emerges, we believe there is still deep value in this stock. We also strongly believe that this “discount” will diminish over time as we approach early-2016 just like in past similar experience of Pacificmas Bhd**. Nonetheless, a minimum investment horizon of two (2) years is needed.

NOT RATED as it may not be exciting in short-term. However, it can be a “safe-heaven” for long-term conservative investors. This is because the stock is able to offer a low-risk total return of ≈40% in the next two years if and when it liquidate all its assets and return the proceeds to its shareholders.

* Currently, the stock is trading at ≈30% to our estimated net asset value of RM2.68 based on the ex-dividend price of RM1.90. This discount is inline with its 0.7x average PBV in the past 2 years before the M&A newsflow emerging.

** Pacificmas Bhd declared 2 special dividends and 1 capital repayment in <2 years after disposing its insurance business.

Source: Kenanga