Published December 24, 2008

DBS takes another hit as analysts lower targets

Shares fall despite S&P keeping stable outlook rating after news of rights issue

By EMILYN YAP
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DBS Group shares shed a further 33 cents or 3.5 per cent yesterday to close at $9.04, as plans for a $4 billion rights issue prompted several research houses to cut their target price for the stock.

Focusing on growth: DBS has said funds raised would strengthen its balance sheet and help the bank grow organically

The slide happened even though Standard & Poor's maintained its stable outlook for the Singapore banking group after the news. The one-for-two rights issue, priced at a 45 per cent discount to the stock's $9.85 closing on Dec 19, would raise funds for the bank to strengthen its balance sheet and grow organically, said DBS on Monday. It also warned of lower fourth-quarter earnings.

Following the announcement, Citi, CIMB, Kim Eng Securities and JP Morgan revised their target price for the counter.

The rights issue could dilute DBS' earnings per share by 33 per cent and reduce its diluted book value per share, said Kim Eng analyst Pauline Lee in a note yesterday.

'Lack of earnings catalysts, coupled with the dilution from the rights issue, will likely depress the share price in the near-term,' she added, and lowered her target price for DBS shares from $13.10 to $10.60 under a 'hold' call.

CIMB analyst Kenneth Ng continued to rate DBS as 'underperform' and dropped the target price from $11.36 to $10.60. 'While the rights issue and DBS' underperformance have made us more positive on its share price in the short term, we believe that credit-cycle concerns make it difficult to sustain any outperformance.'

Among the four houses, Citi set the lowest target price of $8.00, down from $9.50.

Rights issues, especially discounted ones in a weak market, tend to be unpopular with shareholders. Share prices could fall because of the discount and also because shareholders wishing to maintain their stake would have to fork out more money.

On Monday itself, news of the rights issue caused DBS shares to sink to an intraday low of $8.81 before ending 48 cents down at $9.37.

But DBS' move won support from Credit Suisse, which upgraded the counter from 'underperform' to 'neutral'. 'DBS has been our least preferred among the three Singapore banks. However, the fresh equity would allay market concerns, lift pressure off DBS stock and help narrow the price-to-book discount vis-a-vis UOB/OCBC,' said its analysts in a note on Monday.

Standard & Poor's Ratings Services also said yesterday that the proposed rights issue would not affect its ratings on DBS Bank (AA-/Stable/A-1+). It recognised that the new funds would boost the bank's capitalisation, and help mitigate higher asset provisions that could arise from recessionary conditions in Singapore and Hong Kong.