News Last Saturday, StarBiz wrote an article claiming that there could be a possible merger between BIMB and Malaysia Building Society Bhd (MBSB). It was reported that the idea was being mooted at the shareholders’ level of both companies, namely EPF and LTH.
Comments Although this is not cast on stone, it was piece of news which caught us by surprise as we did not expect any M&A activities in the offing given that: (i) the proposed merger between CIMB-RHBCAP-MBSB had just fallen through, and (ii) current market condition is still not conducive for such exercise.
That said, we have conducted multiple scenario analysis to determine the probable structures in which the M&A could pan out (see pg. 3 - 5).
Based on our findings, the deal (if happens) will likely be a 100% share swap exercise (theoretical swap ratio of 1.52 MBSB share for 1 BIMB share) as it could help cushion the impact of acquisition goodwill. The initiative should technically see accretion in EPS (+4%) and BV/share (+76%) given that if the implied P/E and P/B of BIMB are set higher than that of MBSB’s.
If successful, the merger between BIMB-MBSB will see them leapfrog ahead and become the 2nd largest Islamic Bank in Malaysia.
Positives include: (i) net financing margin (NFM) to widen and (ii) cost-to-income ratio (CIR) to fall.
Negatives include: (i) gross impaired loans ratio to spike, (ii) loan loss coverage to fall, (iii) financing-to-deposit ratio (FDR) to increase, (iv) current account & savings account deposit (CASA) to shrink, and (v) ROE to decline.
Outlook We continue to see structural and cyclical headwinds such as: (i) muted loans growth, (ii) narrowing margin, (iii) weak capital market activities, and (iv) higher credit costs to persist into 2015.
The reclassification of its Mudarabah and Wakalah based demand deposits to become investment accounts may see: (i) the size of its balance sheet shrink, (ii) higher funding cost, and (iii) additional opex being incurred to maintain these new accounts.
Forecast No changes were made to our forecasts.
Rating Maintain
OUTPERFORM While there is a chance that BIMB is subject to the acquirer’s curse, we still like the stock for its decent yields of 5% along with its Shariah-compliant status.
Valuation Our TP of RM4.72 based on 2.24x FY15 P/B is kept for now, pending its results release later this week. Note that although BIMB is trading at +1SD above its 5-year average P/B, this can be justified by its higher ROE generation (18%) vs. its historical ROE of 10-13% for the past 3 years.
Risks to Our Call Steeper margin squeeze
Slower-than-expected loans growth
Worse-than-expected deterioration in asset quality
Source: Kenanga
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