Malayan Banking - A narrower discount for DRP issue price

-  We are maintaining our HOLD rating on Malayan Banking Bhd (Maybank), with an unchanged fair value of RM9.50/share. This is based on an ROE of 14.4% for FY12F, which translates into a fair P/BV of 2.0x.

-  Maybank recently announced the issue price of its new shares at RM8.40 each in relation to its 5th dividend reinvestment plan (DRP). 

-  Recall this is for its FY12F interim GDPS of RM0.32, of which the DRP will apply for an electable portion of RM0.28 (RM0.21 net of taxation), while the remaining portion of RM0.04 (RM0.03 net of taxation) will be paid in cash.  

-  The issue price is based on the 5-day volume weighted average market price (VWAMP) of RM9.13 up to and including 6 September 2012.

-  Maybank said the RM8.40 issue price represents a RM0.41 or 4.65% discount to the ex-dividend VWAMP of RM8.81.   

-  The latest DRP indicates a narrowing in discount in pricing compared to the VWAMP. This is not entirely a surprise as Maybank has also hinted that whilst it may continue with the DRP, the features including the discounts may change going forward. 

-  The DRP issue price of RM8.40 is slightly higher than our assumed RM8.00. We have revised our forecasts accordingly, with a +0.2% increase in EPS, and a +0.1% enhancement to book value given the less dilutive impact. ROE is unchanged as is our fair value. 

-  To recap, Maybank had also articulated at its recent Analysts’ Briefing in August 2012 it will continue with its DRP after FY13, although the payout ratio may not be as high as 70% to 80%.  

-  Assuming the 1HFY12’s declared DPS is fully paid, the Section 108 tax credit would be reduced to RM600mil, which is expected to be utilised by mid-2013. 

-  We expect the dividend payout ratio to be lowered to the official guidance of 40% to 60% post utilisation of Section 108 tax credit. We have assumed a dividend payout ratio of 58% for FY13F vs. 75% for FY12F. We maintain HOLD on Maybank as we expect lower dividends ahead. The cumulative effect of the DRP up to FP11 had raised Maybank’s share premium reserves by RM3.7bil, or shareholder’s funds by 11%. Thus, ROE would have been higher at 17.9% FP11 instead of the actual 15.9% FP11 without the DRP plans.    

Source: AmeSecurities