AMBANK has proposed a private placement of up to 300.0m new shares (9.97% of existing share base) to raise funds to support working capital needs arising from a RM2.83b global settlement. This came as a surprise to us as management had previously assured that the group possess sufficient capital buffers. The group also announced an impairment of goodwill of RM2.09b for 4QFY21. We are negative on the news mostly from the new shares’ dilutive effects and downgrade our call to UP with a lower TP of RM2.40 (from RM3.05) while also accounting for cuts to our book value assumptions.

Fund raising to support working capital. In the proposed private placement announced yesterday, AMBANK looks to issue up to 300.0m new shares (9.97% of existing share base) at an issue price that has yet to be determined. Save for funding of the proposed corporate exercise, the funds raised from the placement will be solely utilised for working capital purposes.

We were surprised, as management had previously assured, during its 3QFY21 results’ briefing cum global settlement investors’ call on 1st March 2021, that there is no immediate need to rebuild its CET-1 base given sufficient capital buffers in place. To recap, the full payment of the RM2.83b global settlement would drag AMBANK’s CET-1 ratio to 11.01% from 13.52% based on its Dec 2020 books. If the placement is successful, the group expects its CET-1 ratio to improve to 11.73% (+72 bps). We had also thought that forgoing its FY21 dividends would ease capital strains, but perhaps the cash call could improve dividend prospects for FY22.

Separately, the group also announced that it will undertake a one-off goodwill impairment of up to RM2.09b to be booked in its 4QFY21 results, which mainly comprise consolidation of previous acquisitions and corporate exercises of its conventional businesses. While we do not expect all of the above to result in any material impact to earnings, we are negative on the dilutive effects to shareholders value. That said, it will be interesting to see as to whom these new shares would be placed out to, as the announcement specified that the placement is “expected to facilitate the entry of new institutional investors into the Group”.

Post update, we make no changes to our earnings assumptions but pen in the additional 300.0m shares into our FY22E share capital as we expect the placement to be taken up. The kitchen sinking from the above also translates to downside book value adjustments.

Downgrade to UNDERPERFORM (from MARKET PERFORM) with a lower TP of RM2.40 (from RM3.05, previously). Our lower TP is the result of the share base dilution arising from the proposed placement and cuts to our FY22E BV from the announced impairments. Additionally, we lower our FY22E GGM-derived PBV to 0.50x (1.5SD below the 5-year mean, from 0.51x) as we factor a higher risk-free rate of 3.3% (from 3.1%) across the banking sector. Overall, we anticipate a knee-jerk share price reaction from this announcement.

Risks to our call include: (i) lower-than-expected margin squeeze, (ii) higher- than-expected loans growth, (iii) better-than-expected asset quality, (iv) improvement in capital market activities, and (v) favourable currency fluctuations.

Source: Kenanga Research - 2 Apr 2021