RHBCAP announced last week the extension of its Rights Issue by two months. The delay is to finalise new arrangements with regard to BNM’s order to cap Aabar Investment Subscription entitlement. Extension of Rights Issue. RHBCAP last Friday held a conference call regarding the extension of its RM2.5b Rights Issue by at least two months. To recap, RHBCAP has announced previously that its Entitlement Date had been fixed for 1 October 2015. On 23 Sep 2015, RHBCAP, in an announcement to Bursa, it extended the Entitlement Date to 23 Nov 2015 with commencement of trading Rights to 24 Nov (2 October previously) and listing date of the Rights to 21 Dec (from 30 October previously).

Extension in response to Aabar’s 15% limit to the Rights Issue. The extension is in response to Aabar’s 15% limit to the Rights Issue by BNM and RHBCAP’s prohibition in issuing any further shares in excess of 15% to Aabar. The extension is to allow RHBCAP to finalise arrangements and operationalise the above orders.

Terms of the Rights Issue to be maintained. RHBCAP also clarified that other matters concerning the Rights Issue will be maintained. Other matters that were highlighted; i) EPF and OSK will subscribe fully to their rights. ii) The balance of the 6% that Aabar is not eligible to is still awaiting confirmation from BNM whether to be redistributed to other shareholders or otherwise. As part of their arrangements, the banks involved in the underwriting the Rights Issue will be involved in underwriting the excess 6% (assuming that it is allowed to be redistributed).

Post-Rights Shareholding Structure. In light of the new arrangements, the new shareholding structure post-rights will be as follows; i) EPF – 41.6% ii) Aabar – 20.1% iii) OSK – 10.0% The listing of the RHB Bank Group as the new Bank Holding Company is likely to be finalized by the end of January 2016.

Valuation and Recommendation. Upon completion of the Rights Issue Exercise (assuming by December 2015 if there are no further delays), EPS and ROE for FY15 will be diluted to 65.0 sen and 9.7% as compared to the previous estimates of 79.0 sen and 10.4% respectively. For FY16E, our new estimates are 70.0 sen (EPS) and 9.2% (ROE) as compared to previous estimates of 85.0 sen and 10.4%, respectively. We also rollover our valuation to FY16E in light of the post-rights issue; thus, our new TP is RM7.07 (from RM7.92) based on a blended FY16E PB/PE ratio of 0.9x/9.6x (previously FY15E PB/PE ratio of 1.0x/9.6x). The PB ratio applied takes into account RHBCAP’s share price performance when its return on equity hovered around 9-10%, while the PE ratio applied is within its 3-year historical range of 9-11x.

Upgrade to OUTPERFORM. Having negated the above concerns we upgrade our call from MARKET PERFORM to OUTPERFORM with the impending listing of the new bank holding company. The stock currently is one of the cheapest banking stocks domestically (0.8x fwd PB vs. industry of 1.5x) and value has started to emerge given the recent pullback in its share price. Furthermore at current price there is an 18% upside to our Target Price. Nevertheless in the meantime share price performance could be hindered from reaching its target due to the on-going challenges plaguing the banking industry.

Source: Kenanga Research - 28 Sep 2015