CIMB Group - Sweet deal in the Philippines HOLD

- We are maintaining our HOLD rating on CIMB Group Holdings Bhd (CIMB), with an unchanged fair value of RM8.00/share, based on an ROE of 14.9% FY12F and fair P/BV of 2.1x. 

- CIMB has announced that it is acquiring a 60% stake in the Philippines’ Bank of Commerce (BoC) from the San Miguel Corporation (SMC) group. The acquisition price is PHP12.2bil (RM881mil) or 1.6% of CIMB’s market capitalisation, which is quite digestible, to be funded via internal funds. 

- BoC is the 16^th  largest bank in the Philippines, with a total asset size of PHP95.6bil (USD2.2bil) or RM6.93bil.

- The acquisition P/BV was 1.14x based on BoC’s FY11 financials. But CIMB added that following a post-merger alignment of accounting and provisioning policies,  the P/BV would increase to about 1.3x. We believe that  the P/BV of 1.3x is cheap, despite BoC’s relatively small size, given that CIMB is acquiring a 60% stake. The larger banks in the Philippines are trading at average P/BV of 1.9x.

- More importantly, in conjunction with the acquisition, CIMB has also entered into a Collaboration Agreement with SMC. This means that SMC will be channelling and referring leads from its group of companies, employees and affiliate companies, as well as it suppliers and customers. 

- CIMB said that the short-term impact to earnings is neutral, while the deal is expected to be EPS and ROE accretive from 2013 onwards.  

- All in, the acquisition is positive for CIMB as:- (1) There is no dilutive impact to EPS, given that this is funded through internal funds with no equity raising involved. Impact to EPS is neutral in the short-term but accretive from 2013; (2) The deal is backed by a collaboration agreement with SMC, with CIMB being plugged into SMC’s eco-system right from the start. This reduces CIMB’s learning curve in the Philippines; (3) Shareholding structure also incentivise SMC to fully back the collaboration agreement, given that SMC Retirement Plan will retain a significant 26.93% stake in BOC; (4) Relatively cheap acquisition P/BV of 1.3x for a controlling 60% stake. 

- We are leaving our forecasts unchanged for now given the financial impact to profit and loss and balance sheet is minimal.  We expect CIMB’s share price to receive a boost though as the acquisition details have surprised on the upside. Key re-rating catalysts from here are:- (a) ability to sustain asset quality; (b) stable contribution from Indonesia; (b) better-than-expected non-interest income.  

Source: AmeSecurities