The success of the potential merger of CIMB, RHBCAP and MBSB (Proposed Merger) is more uncertain now as their common substantial shareholder, the Employees Provident Fund (EPF), is not able to vote (in favour of the Proposed Merger) after the application for a restriction waiver was rejected by Bursa. Due to the uncertainty over the success of the proposed merger, we do not rule out the possibility that RHBCAP (MP, TP: RM10.00) and MBSB (OP, TP: RM2.65) may trade at wider discounts to their offer prices of RM10.03 and RM2.82, respectively, especially with their share prices performing well. Recall that we have recently downgraded our calls on RHBCAP and MBSB to MARKET PERFORM from OUTPERFORM following their strong share price performance after the proposed merger announcement.

No waiver for EPF. It was announced on Tuesday that Bursa Malaysia Securities had rejected the application for a waiver to allow the EPF to vote on the proposed merger between CIMB (MP, TP: RM7.15), RHBCAP and MBSB. The other application still awaiting approval is for the proposed merger structure which was submitted to Bank Negara Malaysia (BNM) on 9-Oct-14 (please see our Banking report titled “Moving On With The Proposed Merger”, dated 10-Oct-14). Nevertheless, we opine that BNM’s approval is forthcoming.

Spanner in the works? Although this development could throw a spanner in the works, it does not mean that the proposed merger will come crumbling down so long as there is strong support from other shareholders ex-EPF. To begin with, the entire deal was structured in a way to increase the likelihood of success as RHBCAP being the acquirer of CIMB’s assets and liabilities, entails only 50%+1 vote instead of a higher 75% acceptance.

Neutral for MBSB and CIMB? Drilling down to company level, the development could be neutral for MBSB given that the remaining shareholders will likely vote in favour of the proposed sale of its assets and liabilities, considering the attractive cash offer price of RM2.82/share (at a 2Q14 P/B ratio of 1.9x). Also, we believe that CIMB should be able to garner sufficient votes ex-EPF given that its shareholders will have access to a larger Islamic and regional banking platform.

More uncertain at RHBCAP front? The absence of EPF, however, will require stronger support from minority shareholders. This is because it is widely expected that Aabar Investments PJS (Aabar) could face a tough call given its higher entry cost of RM10.80/share back in 2011.

Profit-taking activities emerging? Due to the uncertainty over the success rate of the proposed merger, we do not rule out that RHBCAP (MP, TP: RM10.00) and MBSB (OP, TP: RM2.65) may trade at wider discounts to their offer prices of RM10.03 and RM2.82, respectively, especially their share prices have been performing well. Since the announcement of the proposed merger, both share prices rallied 9% and 8% to their respective recent high.

Recommendation unchanged. In the meantime, we adjust downwards our recommendation on MBSB (TP: RM2.65) to MARKET PERFORM in light of its strong share price performance. We are also maintaining MARKET PERFORM on CIMB (TP: RM7.15) and RHBCAP (TP: RM10.00) despite an implied potential upside of >10%, after the recent broad market sell-down, until there is more clarity on how the parties involved will react.

Source: Kenanga