INVESTMENT HIGHLIGHTS

• Merger talks with RHB Bank Bhd

• Suitable partner to reinvigorate both banking groups

• Potentially beneficial to shareholders due to the all share merger. Value of MergeCo could be higher than current value of the Group

• However, details are scarce. Maintain NEUTRAL for now with a revised TP of RM5.55

Merger talks with RHB Bank Bhd. The Group announced yesterday that it had received approval from Bank Negara Malaysia to commence discussion for a proposed merger with RHB Bank Bhd (RHB). Following from this approval, both parties have entered into an exclusivity agreement until 30 August 2017. Below are a few points that we understand thus far: 1) It will be an all share merger. 2) RHB will issue shares to acquire the asset and liabilities of the Group. 3) The parties will be exploring for the possibilities for the pricing to be at 1.0x PB. 4) The Group will require 75% shareholders' approval via a special resolution, while RHB will require 50%+1 shareholders' approval via ordinary resolution. 5) It is still early days. Details of the proposed merger are still scarce.

Suitable partners. We believe that this proposed merger is a logical step for both, the Group and RHB given that in our opinion, both group face difficulties in generating solid growth. For example, NII growth was anaemic at -4.5%yoy in FY17. 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.

Potential windfall for the Group’s shareholders. Although the deal is expected to be executed via shares, we believe that the Group’s shareholders will benefit from the merger. Amongst the benefit will be owning an interest in the MergeCo. Given the prospect of earnings accretion from revenue synergies and cost rationalisation, this could potentially increase the value of the shareholding, as illustrated below:

FORECAST

No changes to our forecast.

VALUATION AND RECOMMENDATION

We believe that the merger will be beneficial to the shareholders. However, details are still scarce for us estimate the full impact. As such, we maintain our NEUTRAL recommendation with unchanged TP of RM5.55 based on PB multiple of 1.0x, its 3 years historical average. However, with the potential for the MergeCo value to exceed current value of the Group. In addition, we do not discount the interest on the stock which may drive the price ahead of its fundamentals. Therefore, investors should look to accumulate on any price weakness.

Source: MIDF Research - 2 Jun 2017