News  Affin Holdings (AFFIN)’s Board had on 23 May 2014 resolved to fix the issue price of the Rights Shares at RM2.76 per Rights Share at an entitlement basis of three (3) Rights Shares for every ten (10) existing AFFIN

Shares held by the entitled shareholders at an entitlement date to be determined and announced later.

 The above-mentioned issue price of RM2.76 represents a discount of approximately 20% to the theoretical exrights price of AFFIN of RM3.45 per share, calculated based on the five (5) days volume weighted average market price (WVAP) of AFFIN shares up to and including 22 May 2014 of RM3.66 per AFFIN share.

 The Rights Issue will result in the issuance of approximately 448.37m Rights Shares to raise gross proceeds of approximately RM1,237.51m.

Comments  The entitlement basis of 3-for-10 is very close to our earlier expectation of 1-for-3 ratio.

 Due to the significant share base enlargement of 30%, we expect some dilutions in a few key financial parameters such as EPS, EPS growth, BPS and ROE. Based on our estimates, FY14 EPS may dilute 19% to 33.0 sen from our estimate of 40.9 sen. As such, FY14 EPS may decline 24% YoY from our earlier estimated milder YoY decline of 6%. Besides, BPS will also be diluted by 9% to RM4.13, leading ROE to decline 36bps to 8.9%.

 Based on our estimates, the acquisition of investment banking, asset management and futures dealing assets of HwangDBS (M) Bhd could potentially contribute RM200m in revenue or RM20m-RM40m in net profit based on HwangDBS’ historical net profit margins of 10%-20%. While this could almost neutralise the dilution impact on ROE, AFFIN may still see 9% and 16% dilutions in BPS and EPS, respectively.

Outlook  We reckon that the Group may need to undergo a period of gestation before synergies of the merger with Hwang-DBS materialise.

 Hence, the proposed rights issued will still be dilutive, even if we factor potential additional earnings contribution into our earnings estimate.

 This will result in dilutions in a few key estimates such as EPS, EPS growth, BPS and ROE in the short-run, which may cause selling pressure on its shares.

Forecast  Maintain our FY14-FY15 earnings estimates of RM611.4m (-5.9% YoY) - RM651.2m (+6.5% YoY) pending guidance from the management.

Rating Maintain MARKET PERFORM

Valuation  Our Target Price (TP) remains unchanged at RM4.00 based on 0.8x to its FY15E book value (implying a FY15 PER of 9.2x) on the back of 9.2% ROE. Note that the stock had been trading in the range of 0.8x-0.9x PBV when its ROE was hovering around 9.4%-9.8%.

Risks to Our Call (i) Tighter lending rules and slower loan growth.

 Keener competitions and hence further margin squeeze.

 Sharp turn in the trend of declining NPLs, hence higher credit charges.

Source: Kenanga