News  Public Bank (PBBANK) proposes to undertake a renounceable rights issue with an intention to raise gross proceeds up to RM5.0b.

 The entitlement basis for the rights issue and price has not been fixed.

 However, in the announcement to Bursa, PBBANK indicated that the issue price could be fixed in a discount range of 20%-35%, which is in line with the market discount rates for rights issue in Malaysia.

Comments  While the entitlement basis and issue price have yet to be determined, we believe the proposed rights issue will not be dilutive. For illustration purpose, based on the existing share base of 3.5b shares, the capital outlay required by an entitled shareholder holding 1,000 shares in PBBANK is approximately at RM1,430. As such, we reckon that the proposed rights issue can be done easily on a basis of 1 new share for 10 existing shares. With this assumption, the issue price could be fixed at RM14.30, representing a 29% discount to yesterday’s closing price.

 It is believed that the proposed rights issue is undertaken as part of the Group’s capital management strategy to further strengthen its capital position, especially in Common Equity Tier 1 (CET1), to build up an adequate level of capital buffer in preparation for forthcoming regulatory capital requirements.

Outlook  Assuming a rights issue basis of 1:10, EPS of the Group could be diluted by 10% post rights issuance. Likewise, our DPS estimates are likely to be revised down by 10% due to a larger share base as we continue to maintain our dividend payout ratio of 45%.

 However, book value will increase RM1.43/share inline with the CET1 ratio. As at end-March 2014, CET1 ratio stood at 8.5%. With the additional gross proceeds of RM5.0b, the ratio could strengthen to 10.6%.

 However, ROE of Group may not able to achieve management target of >20%. As at end-March 2014, the annualised ROE was 19.9%. The ROE would decline to 17.8% post issuance of rights issue.

Forecast  No change to our net earnings estimates of RM4,268.1m and RM4,719.6m for FY14E and FY15E, respectively.

Rating  MAINTAIN OUTPERFORM

Valuation  Our Target Price (TP) of RM21.90 remains unchanged. This TP implies FY15 PBV of 3.0x and a FY15 PER of 16.4x.

Risks to Our Call Slower-than-expected household lending growth.

 Higher credit cost arising from faster-than-expected deterioration in asset quality or lower disposal income.

Source: Kenanga