• Merger talks with RHB Bank Bhd ended.

• Missed opportunity to reinvigorate both banking groups.

• Moving forward with Top 4 Strategy.

• Negative news but maintain NEUTRAL as price have declined by 9.8% since merger talk was announced.

• Revised TP to RM4.50 (from RM5.55) due to lower valuation multiple stemming from possible negative sentiment.

Merger talks ended. The Group announced yesterday that it had mutually agreed with RHB Bank Bhd to end discussions on the proposed merger between the two Groups. Both Groups could not reach an agreement on the terms and conditions. As such the exclusivity agreement will lapse immediately.

Missed opportunity. We view this latest development negatively. We believe that the merger will be beneficial to the Group especially to its shareholders. It would have propelled the Group to a strong number 4 position in terms of asset size by being a part of a larger entity. To put into context, we had estimated that the total asset of the MergeCo to be approximately RM368.3m, where its number 3 peer asset size as at 2QFY17 was RM391.1m. As for shareholders, the failed merger means that it would have missed the potential earnings accretion. We had estimated an increase of 25 sen to its BVPS.

Moving forward with Top 4 Strategy. The management indicated that it would be continuing with its Top 4 Strategy, which is to be top 4 in four focused areas. While we believe that the strategy is sound, we have yet to see it having a significant impact to earnings. For example, FY17 NII declined -4.5%yoy, while net profit growth of +1.7%yoy was contributed mostly by NOII which included gains from disposal of foreclosed properties. We believe that more needs to be done especially in growing NII.

FORECAST

No changes to our forecast.

VALUATION AND RECOMMENDATION

As stated above, we are negative on this latest development. In our opinion, the Group has missed an opportunity to propel its position in the industry. We believe that this news will have an adverse effect to sentiments for the Group. As such, we are lowering our target price to RM4.50 (from RM5.55) as we lower our PBV multiple to 0.8x which is 1 standard deviation below its historical average. We opine that the stock merits a downgrade but the share price has retreated by -9.8% since the announcement of the merger talks (1 June 2017). Therefore, we maintain our NEUTRAL recommendation for now.

Source: MIDF Research - 23 Aug 2017