HOLD. BIMB’s move to acquire Dubai Financial Group’s (DFG) 30.5% stake in Bank Islam is positive in plugging minority leakage and paves the way for future restructuring.  Depending on pricing,  we estimate a possible 1-for-1.9 rights issue should the acquisition be fully funded via new shares, but any resultant dilution would be manageable under the two scenarios we explore. Our  Hold  call  and  SOP-derived TP of MYR3.15 are maintained for now  pending details of pricing, structure and funding of the deal.

Outlining two scenarios. This involves  1)  an outright purchase of DFG’s entire 30.5% stake in Bank Islam, raising BIMB’s stake to 81.5%, and  2) a joint bid by BIMB and LTH  in proportion to their current shareholdings of 51% and 18.5% respectively. This would raise BIMB’s stake in Bank Islam to 73.4% and LTH’s stake to 26.6%.

Cost of about MYR1.3b. On an assumed P/BV of 1.4x for Bank Islam’s 2013 ROE of 12.8%, the 30.5% stake would be valued at  about MYR1.3b,  and  would entail a  possible  1-for-1.9 rights issue if funded entirely via new shares at a 20% discount to BIMB’s share price.

Manageable dilution. Under Scenario 1, we estimate a 3% dilution to FY13 EPS but an enhancement in FY13 ex-rights PERs to 9.7x from 10.8x presently. A dilution in FY13 ROE to 12.4% from 13.6% currently would be mitigated by a lower P/BV of 1.2x versus 1.4x presently. Valuations would thus still be decent after the acquisition.

Should opt to fully acquire. The purchase price under Scenario 2 is much lower at MYR0.9b for an additional 22.4% stake, but the dilutive impact is about the same as Scenario 1. We favour plugging as much of the minority interest outflow at BIMB as possible.  If the ultimate aim is to transfer BIMB’s listing status to Bank Islam, we would prefer to see BIMB acquiring DFG’s entire 30.5% stake.

Higher dividends. Separately, BIMB has declared a  second interim DPS of 3.5sen (total  net  FY12  DPS to date:  7sen). BIMB’s dividend policy is a 50% payout on the company’s (not group) net profit, derived primarily from dividends from Bank Islam and Syarikat Takaful.  We raise our  previous  FY12/13  DPS forecasts  from 9.1sen/9.7sen  to 11sen/11.7sen. Current net yields are decent at 3.8% for FY12.

Source: Maybank Research - 18 Dec 2012