PBBANK announced the proposed acquisition of the entire respective equity stake in LPI from Consolidated Teh Holdings Sdn Bhd (42.74%) and The Estate of the Late Tan Sri Dato' Sri Dr. Teh Hong Piow (The Estate, 1.41%) for a cash consideration of RM1.72b (or RM9.80/share). This triggered a mandatory general offer (MGO) to minority shareholders, which we do not believe will see acceptance owing to the 25% discount to LPI's market price. Still, it would be a positive for PBBANK to have acquired the stake cheaply and for LPI to now have a strong financial backstop. The group eyes for more sharing of resources and cross selling to alleviate LPI's 7th largest market share position in the near-term. Maintain our OUTPERFORM calls for PBBANK (TP: RM5.10) and LPI (TP: RM15.00), but call for a REJECT OFFER to LPI's minority shareholders.

Further, it was shared that The Estate will progressively dispose of its 23.4% stake in PBBANK to 10.0% to comply with the Financial Services Act, over the course of five years. While the move was proposed by The Estate and not a mandate from BNM, it could serve as a precedent for the two outstanding cases under the "Grandfather Rule" (i.e. AMBANK, HLBANK).

A fair price for the wider entity. The proposed acquisition for the collectively 44.2% stake at RM1.72b or RM9.80/share entails a valuation of 1.7x FY23 PBV, a discount from its recent closing valuation of 2.3x PBV and our applied 2.6x PBV for LPI. Given the steep discount, we do not believe the MGO to minority shareholders will be accepted. Otherwise, the total cash consideration for the entire 100%-stake would amount to RM3.89b. This proposal will require PBBANK's shareholder's approval which is in our view highly likely to be accepted on the steep 25% discount, and an thus EPS accretive deal. Based on LPI's FY23 earnings of RM313.4m, it looks to accrete additional earnings to PBBANK by 4%. PBBANK has stated that it intends to keep LPI's listing status.

According to PBBANK, the impact to the group's CET-1 ratio post acquisition is -20 bps (2QFY24: 14.5% after dividends) and hence is not expected to affect the group's ability to pay dividends, being well above the group's aspired minimum of 13.0%, of which they intend to gradually improve their payout to be closer to 60%.

Building a stronger insurance unit. Prior to the proposed acquisition, LPI still benefitted as an affiliate to PBBANK via their mutual parent holding company, The Estate, whereby 25% of LPI's business is said to be direct referrals from PBBANK. Through the proposed acquisition, LPI is expected to be able to more directly tap into PBBANK's ecosystem via sharing of branch networks and sales personnel to promote its general insurance products. Meanwhile, the acquisition would enable PBBANK to more immediately serve a full suit of financial products towards a "Universal Banking Model". LPI is presently positioned 7th amongst Malaysia's general insurers in terms of gross direct premium.

Amid the synergistic gains expected from the above, we expect LPI to benefit more from the merger into the PBBANK group, as it now has a strong financial backstop against any unforeseen and material operating risks to itself. In regards to equity, LPI's 2QFY24 reported at RM2.24b while PBBANK's stood at RM56.3b.

Grandfather Rule overhang addressed. The Estate's stance to dispose of its 23.4% stake in PBBANK to 10.0% over five years via a restricted offer for sale (ROFS). More details are expected to emerge in the future on the ROFS, including allocation methodology for the portion of shares distributed to employees, directors and eligible shareholders of the group at a discount. All told, the ROFS provides resolution pathway vis-à-vis the rule that no individual share hold more than 10% of a bank per the Financial Services Act, which was grandfathered to the late founder, but had lacked clarity since his passing. The move will unlock an overhang of 2.60b PBBANK shares (RM11.89b based on a last price of RM4.57). While this translates to an average disposal of 40.0m PBBANK shares per month over sixty months, it may not be a major concern to existing market participation as we gathered that the monthly average traded volume for PBBANK shares tracks at 310m shares over the last five years.

Between the other Malaysian banks, principal shareholders which own more than 10% stake in both AMBANK (OP; TP: RM5.85) and HLBANK (OP; TP: RM27.40) also enjoy the Grandfathering Rule given their shares were accumulated before the FSA came into being; their respective principal shareholders controlling 11.83% and 64.51% in total shares, have also enjoyed exemption from the shareholding threshold of 10% under the grandfather rules. While we do not believe they would necessarily follow PBBANK's precedent in managing its shareholdings, we could at least establish that financial institutions do uphold regulations as required.

Maintain our OUTPERFORM call and TP of RM5.10 for PBBANK, based on an unchanged GGM-derived PBV of 1.54x (COE: 9.9%, TG: 4.0%, ROE: 13.0%) on a FY25F BVPS of RM3.14. We also applied a 5% premium to our TP based on our 4-star ESG rating, led by the stock's strong green financing pipeline. PBBANK remains as one of our 4QCY24 Top Picks as we continue to like the bank for its leading asset quality position which we believe will be well sought after during high loans growth periods as a means to minimise exposure to asset quality leakages. Maintain our OUTPERFORM call and TP of RM15.00 for LPI, based on an unchanged 2.6x PBV on a FY25F BVPS of RM5.77. This represents a 25% premium against our coverage average of 2.1x which we believe is fair given: (i) better net margins of 17% (vs peer's 11%), and (ii) higher dividend returns of 6%-7% (vs peer's 4%-5%). As such, we recommend for minority shareholders to REJECT OFFER on the RM9.80 MGO by PBBANK.

Source: Kenanga Research - 11 Oct 2024