News

Hong Leong Bank (HLB) announced a proposal to undertake a renounceable rights issue to raise gross proceeds of up to RM3.0bn. At first glance, the capital raising exercise could result in a lower ROE. Pending further details, we continue to maintain MARKET PERFORM on HLB.

Comments

Raising gross proceeds of up to RM3.0bn. Yesterday HLB announced a proposal to undertake a renounceable rights issue of new HLB Shares (Rights Shares) to its shareholders to raise gross proceeds of up to RM3.0b (Proposed Rights Issue).

The Rights Issue is expected to be completed in the fourth quarter of 2015. According to management, it envisioned that the proposed exercise will: (i) strengthen the group’s capital position to continuously support its business growth, (ii) facilitate the build-up of an adequate level of capital buffer for forthcoming regulatory capital requirements.

Outlook

The rights issue is larger than our earlier estimates of between RM2.1bn to RM2.2bn. The RM3.0b to be raised from the RI has the immediate impact of diluting the Group’s ROE to 12.52% (from 13.63%) and EPS to RM1.05 (from RM1.27) for FY16.

At an illustrative RI price of RM10.19, the average investment cost is RM12.43/share. Based on illustrative information provided, the indicative allotment basis is 9 rights shares for every 55 shares held at an issue price of RM10.19. Assuming shareholders enter at a cost of RM12.80/share (price at close of market yesterday) and later subscribe to the RI (at the illustrative price of RM10.19/RI share), the average investment in HLB would amount to RM12.43/share.

Forecast

No changes were made to our forecasts. The Group is poised to release its 4Q15 results on 25 August.

Rating

Maintain MARKET PERFORM

Valuation

Our target price is unchanged target price of RM14.22 based on 1.52x CY15 P/B pending the 4Q15 results.

Risks to Our Call

Steeper margin squeeze from tighter lending rules and stronger and expected competition

Weaker competition from its Chinese associate

Slower-than-expected loans growth and deposits

Higher-than-expected credit charges as a results of potential upcycle in non-performing loans

Source: Kenanga Research - 13 Aug 2015