• Maintain BUY and MYR5.30 TP (16% upside) with c.5% FY25F yield. Public Bank and LPI Capital (LPI MK, NR) have requested a suspension in the trading of their respective shares pending an announcement, lending credence to media reports of an M&A deal. By our estimates, an all-cash deal would be earnings and ROE accretive, and would move Public Bank’s CET-1 ratio to a more optimal level – in line with management’s recently stated objective of “optimising capital to maximise ROE”. A share swap would be largely neutral.

• Background on LPI. LPI is predominantly involved in the general insurance business, with a presence in Malaysia, Singapore, and Cambodia. In 1H24, it recorded a net profit of MYR179m, up 31% YoY from a reversal of previous reinsurance reserves in relation to its fire insurance segment. This translated to an annualised ROE of 16% (1H23: 13%).

• An all-cash deal is EPS and ROE accretive while bringing capital closer to its optimal level. Assuming an M&A P/BV multiple of 2x – similar to the earlier AMMB (AMM MK, BUY, TP: MYR5.90)-Kurnia deal – we estimate LPI could be valued at MYR5.3bn (using consensus FY25F BVPS). Assuming an all-cash transaction, we estimate the acquisition could enhance FY25-26F PATMI and ROE by c.+4% and +40bps respectively, but at the expense of capital. On a proforma basis (based on 1H24 CET-1 ratio), we estimate the deal could lower the group’s CET-1 ratio to 12.9% from 14.5% before recovering to 13.8% and 14% by end-2025 and 2026 respectively. Recall that in the recent briefing, management said an optimum CET-1 ratio would be c.13%, with 14% as a more sustainable level in the longer term. Our estimates have not factored in the potential impact of the move to Basel 4, which Public Bank said will be positive for capital. Assuming that Public Bank issues new shares for the acquisition, we estimate the impact would be broadly neutral to EPS, ROE, and capital (Figure 3). We also estimate that in such a scenario, the stake of the estate of the late Tan Sri Dato’ Dr Teh Hong Piow in Public Bank could rise to 24.6% from the current 23.4%.

• Possible rationale. Apart from the above financial effects, we believe such a deal could be part of management’s plan to improve Non-II contribution and follows on the back of its earlier acquisition of RHB Securities Vietnam for VND374bn (c.MYR65m). While the move into manufacturing could raise questions (vs focusing on distribution), it could be that management sees better synergies by being able to offer a full suite of products and services.

• No change to earnings forecasts and TP for now. We await further details on the deal and are keen to hear management’s view as to how the acquisition fits into the group and its strategies. Our TP includes a 2% ESG premium applied to the intrinsic value.

Source: RHB Research - 9 Oct 2024