INVESTMENT HIGHLIGHTS

• Approval from Bank Negara to start merger talks with AMMB Holdings Bhd

• Looking to acquire asset and liabilities via share issuance

• Merger will solidify the Group’s position as no. 4 bank

• Potential as launch pad for future growth

• No change to forecast

• Details still scarce. Maintain NEUTRAL for now with unchanged TP of RM5.65 as we peg FY18 BVPS to PB multiple of 0.98x

Merger talks with AMMB Holdings Bhd. The Group announced yesterday that it had received approval from Bank Negara Malaysia to commence discussion for a proposed merger with AMMB Holdings Bhd (AMMB). Following from this approval, both parties have entered into an exclusivity agreement until 30 August 2017.

But sounds more like an acquisition. We participate in a briefing with the management yesterday for clarification on the proposed merger. Below was the key take away: 1) It will be an all share merger. 2) The Group will issue shares to acquire the asset and liabilities of AMMB. 3) The parties will be exploring for the possibilities for the pricing to be at 1.0x PB. 4) AMMB will require 75% shareholders' approval via a special resolution, while the Group will require 50%+1 shareholders' approval via ordinary resolution. 5) It is still early days. Details of the proposed merger are still scarce.

Solidifying the Group's position. We believe that this proposed merger is a logical step for both, the Group and AMMB. At current juncture, we believe that both group face difficulties in generating solid growth. This was evident by its performance in the previous quarters. For example, PPOP for the Group fell -4.9%yoy which was contributed by total income decline of -1.7%yoy in 1QFY17. We believe that this merger will propel the merged entities of the Group and AMMB (MergeCo) to a strong no. 4 position in terms of asset size. Below is a comparison of between the potential MergeCo and its peers:

Dilutive effect but potentially higher value. With the merger being on an all share basis, there potentially will be a dilutive effect to current shareholders. However, based on our estimation, shareholders of both entities will potentially hold shares of higher value as highlighted in the tables below (our assumption is based on the price of 1.0x PBV and on the latest BVPS which was release in 1QCY17). This does not include the fact of the potential impact of earnings accretion, higher interest on the share and better valuation.

Launch pad for future growth. We believe that by solidifying its position, the MergeCo will be able to consolidate its operations and product offerings. This may lay the platform for the MergeCo to take advantage of any revenue synergies that the larger organisational platform can attain and initiate better growth momentum more akin to its peers. However, we foresee that additional investment, such as for restructuring, systems and techonology, will have to be made to streamline both entities into a single Group.

FORECAST

No change to our forecast.

VALUATION AND RECOMMENDATION

All things considered, we are positive on the proposed merger as it will create a stronger banking group, which we believe will be able to compete with its peers more effectively. We also estimate that it will be beneficial to shareholders. However, details are still scarce and we still do not know on key terms such as the pricing, which may hinder the deal. The last transaction via the asset and liabilities method, Hong Leong Bank and EON Bank merger, was done at 1.4x PB. As such, we maintain NEUTRAL on the stock for now with unchanged TP of RM5.65 based on pegging 0.98x to its FY18 BVPS, which is the 3-year average PBV.

Source: MIDF Research - 2 Jun 2017