Price Target: RM10.96
Share price: RM9.03
News:
Maybank and CIMB said (in separate announcements) that they have decided not to pursue the possible merger with RHB Cap at this juncture.
CIMB further said that it does not believe the group could arrive at a value creating merger.
Financial impact:
None.
Pros / Cons:
No change in fundamental outlook of RHB Cap.
Without merger uncertainties (which could affect staff morale), it will be back to BAU (Business As Usual). A protracted merger negotiation(s) could derail business plans and trajectory as well as result in staff attrition.
Share price fell given that it surged drastically post announcement of Maybank and CIMB’s initial interests. Recall that RHB Cap close at RM9.22 on 31 May 2011 (the day both CIMB and Maybank announced approvals from BNM to commence merger negotiations). Subsequently, it jumped to as high as RM10.60 the next trading day.
We are not surprised by CIMB and Maybank’s decisions given that, based on our initial assessment (please refer to our Banking Sector report dated 1 Jun 2011), there are a lot of domestic duplications while the acquirer would most likely suffer from dilution to ROE and capital ratios.
Risks:
Unexpected jump in impaired loans and lower than expected loan growth as well as impact from Basel III.
Forecasts Unchanged.
Rating BUY
Positives - ROE at industry average but valuations among the lowest (see Figure 1) vs. larger peers; Transformation bearing fruits, reflected in strong loan growth and improving asset quality; “Easy” contributing to higher market share in retail segment; and potential of the tie-up with Pos Malaysia.
Negatives - Lack of liquidity.
Valuation:
Target price unchanged at RM10.96 based on Gordon Growth with ROE of 15.3% and WACC of 9.9%.
We view any share price weakness from this saga as opportunity to accumulate a bank that is gaining market shares and earnings growth traction but still trades at discounts to peers with comparable ROE as well as the sector average.
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