RHB Capital - A more digestible acquisition of Mestika

-  We maintain our BUY rating on RHB Capital Bhd (RHB Cap), with a revised fair value of RM8.40/share FY13F (vs. RM8.60/share previously). This is based on a new FY13F ROE of 12.3% (vs. 12.9% FY12F previously), and a marginally lower fair P/BV of 1.3x FY13F (1.31x previously). Book value is revised to RM6.37/share FY13F (from RM6.44/share previously) due to an increased share base from our assumed rights issue.

-  RHB Cap has announced final details of its proposed acquisition of PT Bank Mestika Dharma (Bank Mestika). RHB Cap is now acquiring a 40% stake, revised from the earlier announced 80%. The total cost of acquisition is RM651mil, which works out to a P/BV of 3.08x based on Bank Mestika’s June 2012’s book value. However, based on the latest September 2012’s book value, we estimate the acquisition P/BV at 2.9x, lower than our earlier expected 3.0x. As RHB Cap had already paid an initial deposit of RM113mil, the net outlay is now RM539mil.  

-  Funding details of the acquisition will be announced later, but it is widely anticipated to be via a rights issue. We expect RHB Cap to eventually raise a higher amount of rights issue to fund Bank Mestika’s expansion. We have assumed therefore that the total rights issue may be RM1bil. In that case, assuming that the rights issue price is at RM5.60/share, we estimate that it would be on a 1 rights share-for-12 shares basis, well within a digestible range. The total rights would make up about 8% of the current share base.

-  Group common equity Tier 1 (CET1) as at end-September 2012 before the acquisition of OSK was 8.5%, based on Bank Negara’s final guidelines. Without a rights issue, the group CET1 is estimated at 8.45%, post the acquisition of Bank Mestika and OSK, which means that group CET1 is relatively unchanged. With a rights issue, we estimate group CET1 at 9.4%, which is comfortably above the minimum requirement of 7% by 2019.

-  The deal is positive as:- (a) the acquisition of a 40% stake in Bank Mestika involves an additional outlay of only RM539mil, which is easily digestable; (b) acquisition P/BV of 2.9x based on latest September 2012’s book value is lower than our earlier expectations of 3.0x; (c) group CET1 looks reasonable, with or without a rights issue; (d) RHB Cap has larger control, with a right to appoint board of directors despite acquiring only a 40% stake. 

-  We anticipate the following rerating catalysts for RHB Cap:- (a) stabilisation in gross impaired loans; (b) betterthan-expected loan loss provisions; (c) higher fee income from its investment bank, which will provide evidence of revenue synergies for its proposed OSK acquisition; (d) newsflow on management team for the investment bank; and (d) finalisation of rights issue for Bank Mestika.

Source: AmeSecurities