THE BUZZ
Hong Leong Bank (HLBank) has entered into a conditional sale
and purchase agreement with Hong Leong Capital Bhd (HLCB) for the proposed
disposal of its entire equity interest in MIMB Investment Bank for RM157.9m.
OUR TAKE
No surprise. The disposal of MIMB to HLCB is not surprising
as the Hong Leong Financial Group (HLFG) is not allowed to hold more than one
merchant banking licence and HLFG has always intended to maintain its
investment banking business under HLCB in accordance with the group’s
structure. The RM157.9m pricing was based on 1x NTA of MIMB as at 31 July 2011,
which we deem fair given MIMB’s unappealing ROE and the fact that the sale may
not incorporate certain elements of MIMB’s treasury books.
Leveraging on MIMB’s
unutilized tax losses. We believe
that the proposed rationalization of HLCB’s investment banking business under
MIMB, via the transfer of the entire assets and liabilities of Hong Leong
Investment Bank to MIMB, will allow HLCB to benefit from MIMB’s estimated
unutilized tax losses of RM1bn. This amount can be used to offset against
future taxable profit on its investment banking subsidiary.
No material
impact on earnings. Given MIMB’s lacklustre
earnings track record and franchise with
an average annual net profit ranging from RM2.3m to
RM4.7m over the past 3 years, the sale
of MIMB is a sensible move as it will allow the group to free up excess
resources and focus on its core commercial banking business.
Maintain NEUTRAL.
The group is poised to capitalize
on the longer term growth opportunities in view of its larger post-merger
organizational footprint. However, the slowing economic environment over the
medium term and HLBank’s relatively conservative culture could cap any immediate-term
revenue upside synergies, which are already reflected in its
lower-than-expected loans and transaction fee income growth. Therefore, we are
maintaining our NEUTRAL recommendation and FV of RM12.54 (2.0x FY12 P/BV, 15.1%
ROE).
Source: OSK188
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