Affin has priced its  3-for-10 rights issue  at MYR2.76/rights  share  –  at  a 20%  discount  to  the  theoretical  ex-rights  price  based  on  the  5-day VWAMP;  448m  new Affin shares will be issued  or +30% to share base. The acquisition of Hwang IB is likely to be  near-term  dilutive due to the rights  issue  and  integration  costs.  Investors  will  need  to  be  patient before benefits are reaped. Retain Neutral, with revised FV of MYR3.76.

• Rights shares pricing fixed.  Affin announced last Friday further details with respect to its MYR1.2bn rights issue. The exercise price of the rights shares has been fixed at MYR2.76 each, at an entitlement basis of three rights shares for  every  10  existing  Affin shares held.  The exercise price is at a 20% discount to the theoretical ex-rights price, based on the 5-day volume weighted average market price (VWAMP) of MYR3.66. A total  of 448.4m new Affin shares will be issued pursuant to the rights issue,  or +30% to the current outstanding number of shares. According to  Affin’scircular, the rights issue is expected to be completed in June 2014.
• Forecasts.  We  will  incorporate  both  the  acquisition  of  HwangDBS Investment Bank (Hwang IB) and the rights issue upon completion of the rights  exercise  to  avoid  distorting  valuations.  Factoring  in  both  the acquisition and rights issue will lead to a dilution in EPS; since the share price has not  gone ex-rights  yet, using the current cum-rights price will distort the stock’s  P/E. However, we set out in Figure 1 below the impact of both acquisition and rights issue on our numbers. Affin expects to reap a total MYR84m in synergies over the next three years (2015-17). These could  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 dis-synergies amounting  to  MYR25m,  mainly  from  the  institutional  equities  business. Meanwhile,  Affin  has  guided  that it will incur  approximately  MYR54m in integration cost over the next 12-18 months.
• Investment case. We are adjusting our FV to reflect the dilution from the acquisition  and  rights  issue.  Assuming:  i)  a  cost  of  equity  of  9.8%;  ii) ROE  of  9%;  iii)  long-term  growth  of  4.5%,  and  iv)  an  adjusted  FY14F BVPS of MYR4.15  for the acquisition of Hwang IB and rights issue, our ex-rights FV based on the Gordon Growth Model works out to MYR3.55,or  MYR3.76  on  a  cum-rights  basis.  Our  previous  FV  of  MYR4.30 assumed  a ROE of 9.5%  and FY14F BVPS of MYR4.54,  while the other assumptions were unchanged. NEUTRAL call maintained. 

Source: RHB