The Group has made a series of proposals which could ultimately lead to RHBBANK assuming the listing status of RHBCAP. While details are still sketchy at the moment, based on the provided number (mostly illustrative), the corporate exercises could result in a higher ROE and correspondingly better valuations for the Group. However, investors entering now may find the investment to be a somewhat neutral deal. Pending further details, we continue to maintain MARKET PERFORM on RHBCAP. A series of proposed corporate exercises. Yesterday, RHBCAP announced a series of four proposed corporate exercises which could see wholly owned subsidiary RHBBANK taking over the listing status of RHBCAP:- According to management, it is envisioned that the proposed corporate exercises will: (i) improve the Group’s tax efficiency, (ii) potentially enhance share value, (iii) provide for a stronger counterparty for business-as-usual business, capital cost and regional expansion, (iv) enhance business cost, risk synergies amongst businesses and meet Basel III requirements, and (v) strengthen the Group’s capital structure to meet the changes in regulations and continuing growth in business.

At an illustrative RI price of RM5.70, averaged investment is RM7.84/share. For the first leg of the proposed corporate exercises, the illustrative information provided seem to indicate a possible allotment basis of 1 rights share for every 6 shares held at an issue price of RM5.70. Assuming shareholders enter at the cost of RM8.20 (price at close of market yesterday) and later subscribe to the RI (at the illustrative price of RM5.70/RI share), the average investment in RHBCAP would amount to RM7.84/share.

Listed RHBBANK shares may trade between RM6.00-RM7.00. The RM2.5b raised from the RI has the immediate impact of diluting the Group’s EPS (-15%) and more importantly ROE (-11%). However, the completion of the series of corporate exercises could see ROE potentially edging upwards by 5%. The improved ROE would warrant a higher price-book (PB) value For illustrative purposes, the PB ratio used in the announcement was 1.33x, which we understand represents the lowest end of the PB range of comparable listed financial companies. Hence, the shares of RHBBANK (once listed) could potentially trade between RM6.00-RM7.00.

An Investment Neutral Deal. Looking at the proforma accounts, the share swap ratio may be 1.3 RHBBANK share for every 1 RHBCAP share held. Hence, 1.3 RHBBANK shares would effectively be worth RM7.87 (based on the assume RHBBANK share price of RM6.15 at PB ratio of 1.33x as discussed above). This would mean that new investors would only manage a breakeven in terms of potential capital gain at the end of the corporate exercises. Considering these parameters, we are somewhat neutral on the proposed development.

Source: Kenanga Research - 14 Apr 2015