RHB Capital - At a compelling turning point

-  We upgrade our rating on RHB Capital Bhd (RHB Cap) to BUY from Hold, with a higher fair value of RM8.50/share (from RM8.20 previously). This is pegged to unchanged fair P/BV of 1.5x and ROE of 13.2% but on higher book value of RM5.73 (from RM5.66) for FY12F. 

-  RHB Cap had recently announced it had received approval from regulators for its proposed merger with OSK Investment Bank group (OSKIB). We expect no surprises in terms of final details of the acquisition. We expect the acquisition valuation to be at P/BV of 2x or acquisition price of about RM2bil in total. This is likely to be funded via new share issue. Based on our sensitivity analysis, financial impact looks neutral. 

-  But, the qualitative effect from the deal is now positive. This is because of latest developments at RHB Cap post the proposed mergers with either CIMB or Maybank in mid-2011. We reiterate our view that the approval to go ahead with acquisition of OSKIB is positive for RHB Cap because it removes uncertainty over the future direction of RHB Cap. 

-  Elsewhere, we have also turned positive on loan loss provisioning and credit costs, given that asset quality trend is now turning out to be better than expected. We understand that there has been no significant new SME impaired loans in recent months, while the earlier selected SME in the manufacturing and exports segments which had turned into impaired loan status in the beginning of the year have now stabilised. We are now revising our credit costs assumptions to 54bps (from 64bps). This is still conservatively higher than the company’s target of 30bps to 50bps. 

-  RHB Cap’s share price has retraced from recent high of RM8.03 in March 2012, while recent low was circa RM7.00. The last remaining concern that may possibly affect RHB Cap’s share price may be its relatively low loan loss cover of 74%. However, even if we have to adjust upwards loan loss cover to 100%, this affects book value by only RM0.40/share, or 7% from our current forecast of RM5.33/share. Adjusted P/BV remains cheap at 1.4x. 

-  We believe RHB Cap is now at a compelling positive turning point. We foresee the following rerating catalysts for RHB Cap (a) stabilisation in gross impaired loans; (b) better-than-expected loan loss provision; (c) higher fee income from its investment bank, which will provide evidence of revenue synergies for its proposed OSK acquisition.   

Source: AmeSecurities