• D/G to NEUTRAL from Buy with new MYR4.80 TP from MYR5.30, 5% upside. We view Public Bank’s proposal to acquire a 44.2% stake in LPI Capital (LPI MK, NR) is not a bad deal, more so relative to its last traded price. It gives PBK control over LPI while providing a mild uplift to EPS. The impact to capital is manageable while PBK’s dividend payout is intact. However, extracting synergies from the deal may not be easy and the need for PBK’s major shareholder to reduce its stake may cap the stock’s upside potential.

• The deal. PBK has proposed to acquire the estate of the late Tan Sri Dato’ Dr Teh Hong Piow’s (Estate) 44.2% stake in LPI for MYR1.7bn cash, or MYR9.80/LPI share. This values LPI at a 2023 P/BV of 1.7x – broadly in line with past M&A multiples but at a 25% discount to LPI’s last traded price. Hence, while the proposed acquisition will trigger the mandatory general offer requirement, we think the majority of LPI minorities may not accept the offer given the large discount to traded price. In any case, PBK has stated its intention to retain LPI’s listing status. Also, despite holding <50% stake in LPI, we understand that PBK will have control and be able to fully consolidate LPI.

• Impact on financials. Assuming PBK holds just a 44.2% stake, the impact is not too significant, ie +2%/+20bps to EPS/ROE and -60bps/-20bps to CET-1 ratio at bank/group level. Bank level CET-1 ratio falls to 12.4% but management is comfortable with this and retained its 50-60% dividend payout ratio. With a 100% stake, this could add 4%/50bps to EPS/ROE but dilute CET-1 ratio by an estimated 150bps/50bps at bank/group level. This scenario, though, is likely remote.

• Rationale and synergies. The main rationale behind the acquisition is to improve the efficiency of synergies between PBK and LPI. PBK is the top residential mortgage player and a top auto financier while LPI is ranked first and ninth in fire and motor in the general insurance industry. However, LPI only derives c.20-23% of its business from PBK, which leaves room for improvement. That said, realising such synergies may not be easy.

• Approvals required. The proposed acquisition is subject to PBK shareholders’ approval. Approval from Bank Negara Malaysia/Ministry of Finance was obtained on 29 Aug.

• Separately, the Estate intends to reduce its stake in PBK to 10% from the current 23.4% to comply with the FSA. This will be done via a restricted offer for sale to employees, directors, and eligible PBK shareholders over a five- year period. While the gradual reduction should soothe fears of a sharp selldown, this may still cap the stock’s upside potential.

• No change to earnings forecasts but TP cut by 9% as we lift our risk premium assumption by 50bps to reflect the potential overhang from the selldown by its major shareholder. Our TP includes a 2% ESG premium.

Source: RHB Research - 11 Oct 2024