While  we  laud  Affin’s  recent  acquisition  of  Hwang  IB  as  a transformational deal for  the group, investors will need to be patient to reap the benefits. Affin guided for MYR84m in synergies over the next three years,  and a steady  annual run rate of MYR43m  thereafter. In the near term, the acquisition is likely to be dilutive due to the impending rights issue and integration costs of MYR54m. Maintain NEUTRAL.

• Acquisition  completed.  Affin  Holdings  (Affin)  held  an  analyst  briefing yesterday  to  provide  further  details  on  the  acquisition  of  HwangDBS Investment Bank (Hwang IB), which was completed on 7 Apr 2014.
• A complementary deal. The management reiterated that the acquisition was  a  good  fit,  with  Hwang  IB’s  strengths  in  retail  and  asset management  complementing  Affin’s  bank-backed  balance  sheet  and strength in the government-linked companies segment.
• Merger  synergies  and  integration  costs.  Affin  expects  acquisition synergies to stem from four main sources: i) cross-selling to Hwang  IB’s customers, ii) cross-selling to Affin’s customers, iii) cost synergies, and iv) transformative synergies,  although these are  only expected to realise in the longer  term.  Over the next three years (2015-17), Affin expects  to reap  a  total  of  MYR84m  in  synergies.  These  comprise:  i)  revenue synergies of MYR32m from cross-selling opportunities, ii) cost synergies of  MYR79m  relating  to  productivity  gains,  scale  benefits  and  branch consolidation,  and  iii)  expected  dissynergies  of  MYR25m,  mainly  from the institutional equities business. Beyond that, management expects  a steady net synergies level of MYR43m  per year.  In terms of integration costs,  Affin  guided  for  MYR54m  to  be  incurred  over  the  next  12-18 months. These include costs for IT, system platform and rebranding.
• Others. Further details on rights issue  will only be forthcoming later this month.  Recall  that  Affin  plans  to  raise  gross  proceeds  of  MYR1.25bn from  a  rights  issue,  of  which  MYR1.05bn  will  be  used  to  fund  the acquisition  and  around  MYR200m  will  be  earmarked  for  Affin  Bank’s capital  needs.  Finally,  Customer  Day  One  is  planned  for  3Q14  while Single Platform Day One is slated for 4Q15.
• Forecasts.  Pending  further  details  on  the  rights  issue  (eg  pricing, number of rights shares), we leave our earnings forecasts unchanged.
• Investment  case.  We  keep  our  MYR4.30  FV  (10x  CY14  EPS)  and NEUTRAL call on the stock.

Company Profile

Affin Holdings’ principal activities  are commercial banking and hire purchase, Islamic  banking, investment banking and stock-broking, money-broking,  fund  and  unit  trusts  management.  The  group  is  also  involved  in  life  and  general  insurance  via  its  jointly-controlled entity/associate

Source: RHB