GMD Kellee Kam’s resignation has been confirmed without any indication of a potential successor as yet. However, Kam’s agreement to stay on until his duties have been handed over should alleviate any risk of business disruptions. The new leadership is also unlikely to dramatically alter the Group’s strategic direction in the immediate term as its current IGNITE transformation plan stretches out till 2017. Having said this, its share price performance could still be hindered from our target due to 1MDB concerns. Nevertheless, collateral can be taken even if the worst case scenario were to materialise, thus limiting loss. Negating these concerns, we reiterate OUTPERFORM on RHBCAP given its value proposition.

GMD Kellee Kam steps down. Yesterday, RHBCAP confirmed the resignation of its Group Managing Director (GMD), Kellee Kam Chee Khiong. The announcement to Bursa Malaysia Securities Berhad was released after various media reports surfaced about his departure. Kam has served RHBCAP at the helm for close to 4 years now; having first being appointed as Managing Director on 10 May 2011 before being appointed to his current position as GMD on 9 Jan 2012.

No indication of potential successors yet. There was, however, no indication as to who could be next in line for the position of GMD. It was rumoured that one potential candidate could be RHBCAP’s own Deputy GMD (and Managing Director of RHB Bank), Dato’ Khairussaleh Ramli, given that his role was created for him when he join RHBCAP in Dec 2013.

Little to no disruption in operations. The announcement further revealed that there is a succession plan in place and that Kam will remain as GMD until his responsibilities have been handed over to his successor. Hence, transition is expected to be smooth without the risk of RHBCAP being left without a head. In this respect, we do not anticipate any disruption to operations.

Strategic direction likely to be maintained. Nevertheless, a new leadership could possibly bring about changes in the strategic direction of the Group, which in turn, could be a risk to our call. However, we believe that such changes, if any, will not be imminent given that the incoming head will likely require some time to settle into his/her new role. Furthermore, the Group has already put into place a strategic transformation programme known as IGNITE 2017 which is targeted to improve the Group’s foothold in underserved markets such as Islamic banking, treasury, SME and the mass affluent segment, accelerate growth in Singapore as well as enter new markets such as Philippines and China. Hence, continuity of the Group's strategic approach is likely, as per the announcement, and it should be business as usual.

1MDB concerns could prevent share price hitting target. Having said this, RHBCAP’s share price could still be hindered from approaching our target given the Group’s 32.41% (or c.RM648m) exposure to 1Malaysia Development Bhd (1MDB). The latter is now in technical default of its RM2b loan following its failure to repay the amount (originally due on 30 Nov 2014) despite being given two onemonth extensions. Lenders are reportedly to revert on whether to call an event of default on 18 Feb 2015. Nonetheless, we believe that potential risk to earnings is capped given that the loan is collateralised against 1MDB’s power assets. Also, market talk has it that 1MDB is close to closing a deal with billionaire Ananda Krishnan, who sold the former its collection of power assets, that could help the former repay its debts.

Maintain OUTPERFORM. Having negated the above concerns and given the Group’s value proposition, we maintain our OUTPERFORM call on RHBCAP with an unchanged TP of RM9.35 (based on a blended PB/PE ratio of 1.2/10.7x). The PB ratio applied takes into account RHBCAP’s share price performance when its return on equity hovered around 11-12%, while the PE ratio applied is within its 3- years historical range of 10-11x. RHBCAP remains one of the cheapest banking stocks domestically (1.0x fwd PB vs. industry: 1.6x) while providing similar return on equity to banking heavyweight, CIMB (RHBCAP’s 11.7% vs. CIMB’s 11.5%). Furthermore, we are positive on RHBCAP’s IGNITE 2017 transformation program which is targeted to enhance areas lacking representation. Nevertheless, in the meantime, share price performance could be hindered from reaching its target as concerns over the Group’s 1MDB exposure still looms. 

Source: Kenanga