Affin’s announcement that it had received approval from BNM to begin negotiations with Hwang-DBS for a potential M&A exercise is unlikely to surprise the market, on the back of recent news reports. While we see a good fit in terms of the businesses both parties bring to the table, Affin’s lack of scale does pose some questions in our mind regarding potential synergies that the merged entity may be able to achieve.

-  Commencing negotiations for Hwang-DBS (HDBS). Affin announced yesterday that it had received approval from BNM to commence negotiations with HDBS to acquire the businesses of HwangDBS Investment Bank (HDBS IB), including other financial services businesses of HDBS. BNM’s approval to commence negotiations is valid for six months. Apart from HDBS IB, we think the other main business Affin would be eyeing is Hwang Investment Management (Hwang IM), which is 53%-owned by HDBS.

-  Merged entity’s broker ranking and AUM set to jump significantly. While the acquisition will not change Affin’s ranking in terms of loan and asset size, we do note that the merged group will see Affin Investment Bank move up the broker ranking significantly, i.e. to third position from 13th currently. In terms of AUM, Affin’s AUM was just MYR1.9bn as at end-2012 vs. Hwang IM’s MYR16bn as at end-Jul ‘12.

-  Acquisition positive for higher non-interest income contribution. We think HDBS’ business complements Affin’s business rather well, with the two key areas being equity broking and investment management. That said, Affin’s lack of scale, especially in the fund management business, could mean that achieving cost synergies may be more challenging.

-  Valuations and impact. Assuming a P/BV multiple of 1.6x or 15-20% discount to the recent Maybank-Kim Eng and RHB–OSK deals to take into account HDBS’ smaller size and domestic-centric business, we obtain a valuation range of MYR1.35-1.5bn (based on Jan ’13 book values of HDBS IB and HDBS). Our rough estimates suggest earnings dilution, assuming debt:equity mix of 50:50.

-  Valuation and recommendation. No change to our fair value of MYR3.60 (CY13 PER of 9x) and Neutral call on the stock.

Source: RHB