Last week, it was widely reported that the Melbourne-based Australian New Zealand Banking Group (ANZ) is ready to divest its 24% stake in AMBANK at US900m, with KWAP the likely acquirer at 1.0x P/B. The valuation is similar to ANZ’s current value of its stake in AMBANK and most likely ANZ is agreeable with the price; thus, a major stumbling block in the AMBANK-RHBBANK merger is removed.

To merge at 1.0x P/B? Last month, both AMBANK and RHBBANK announced the approvals from BNM for both parties to commence negotiations for a potential merger with RHBBANK the likely acquirer with the exercise likely to be an all shares merger. From our understanding, the acquisition price tag targeted or share swap will be done based on 1.0x Price/Book Value for AMBANK while the value for RHBANK is yet to be ascertained.

Pricing and shareholders’ approval a stumbling block. As with other potential mergers, potential banking mergers have always been fraught with major issues namely pricing and shareholders’ approval. While there seems to be no issue from RHBBANK as it would need a 50% plus 1 approval for the acquisition, there are speculations that AMBANK’s ANZ shareholders which hold a 23.8% stake in AMBANK might be a stumbling block in the proposal as the pricing might not be palatable to them. From AMBANK’s perspective, it would require a 75% vote for the proposal to be acceptable. It has been extensively reported that ANZ is open to dispose its entire 23.8% stake in AMBANK following pressure from shareholders back home to improve returns from their Asian assets. However, so far, there has been little or no interest from local banks to take up the entire block, with pricing said to be a key stumbling block.

Carrying value at 1.0x P/B. From the recent 1H17 financial statements ending 31 Mar 2017, the value of its holding in AMBANK was maintained at AUD1,198m with no impairments made despite the market value being less than its carrying value, indicating that ANZ is comfortable with disposal of its AMBANK’s stake at ~1.0x P/BV. At the carrying value of AUD1,198m this implies a price of AUD1.67/share or RM5.53/share (based on the AUD/RM average of 3.31 in 1H17) or specifically at 1.04x P/BV, closer to the proposed acquisition value and ANZ’s carrying value of its stake in AMBANK. Based on a USD/AUD average in 1H17, USD900m will fetch AUD1,188m justifying the proposed sale at ~1.0x P/BV.

KWAP the potential acquirer? Another stumbling block in the disposal of ANZ’s block of shares is its large stake of 23.8% in AMBANK. From our estimates, a post-acquisition shareholding structure will see EPF poised to become the largest shareholder with a 29.5% stake, followed by Aabar at 11.9%, ANZ at 10.5% and OSK at 5.6%. Post-acquisition, ANZ’s block of shares will be reduced to ~10% with KWAP likely to be the acquirer judging from media reports that it is looking favourably to purchase at 1.0x P/B and up to 10% of the merged entity.

Potential upside of 8%, maintain MARKET PERFORM. The recent news of potential acquisition of AMBANK at 1.0x PB has revived our interest in this stock. Our TP of RM4.91 is based on a 0.94x FY18E P/B and below the proposed acquisition of 1.0x P/B. At a 1.0x FY17E P/B AMBANK is valued at RM5.32 implying a potential upside of 8%, which is a fair target to achieve, considering that the stock reached a peak of RM5.62 or 1.06x P/B in May 2017.

Source: Kenanga Research - 17 Jul 2017