Monday, 11 March 2013

RHB Capital - ROE target within reach


-  We maintain our BUY rating on RHB Capital Bhd (RHB Cap), with a higher fair value of RM8.90/share (vs. RM8.40/share previously). This is based on an FY13F ROE of 12.3% (from 12.0%), and a fair P/BV of 1.4x (from 1.3x).

-  The company has disclosed that its group common equity ratio is estimated at 8.6% in 4QFY12, higher than the 8% in 3QFY12. This included phase-in arrangements allowed in relation to its hybrid capital.

-  For RHB Cap, the reported hybrid capital is about RM601mil. Thus, stripping this off, we estimate group CET1 ratio still at a comfortable level of 8.1%.

-  At a recent briefing, the company maintained it is likely to contemplate a rights issue, but further hinted that the size of the issue is likely to be only slightly larger than the cost of RM651mil to acquire Bank Mestika.

-  This is less than our initial assumption of RM1bil. Recall that we had assumed a total rights issue of RM1bil, or about 1-for-12 rights issue at RM5.60 (representing a 25% discount to the theoretical ex-rights price).

-  We are now revising our assumption on the rights issue, now at 1-for-18, at RM5.60/share, with the total amount to be raised adjusted to RM761.6mil.

-  We also expect credit cost to be relatively benign, and likely to range within the normalised level of 25bps to 30bps targeted by the company. We are thus revising our credit cost assumption to 31bps from 35bps.

-  The two adjustments have led to a 0.3 of a percentage point increase in our ROE estimate, to 12.3% from 12.1% for FY13F. Nevertheless, this is still some way off from the company’s articulated ROE target of at least 13% for FY13F.

-  To raise ROE to 13%, we estimate that total net earnings will need to be adjusted upwards by only RM120mil, or only about 6% from our forecast level. At ROE of 13%, this could justify a fair P/BV of 1.5x or RM9.80. Or, without the rights issue, ROE would also be raised by 0.3ppt to 12.6%.

-  Foreign shareholding is relatively unchanged at 9% currently compared with about 8% a few months ago. We estimate foreign shareholding peaked at 11.26% as at endDecember 2010.

-  We expect the following rerating catalysts for RHB Cap:- (a) stabilisation in gross impaired loans; (b) better-thanexpected loan loss provisions; (c) higher fee income from its investment bank; and (d) finalisation of rights issue for Bank Mestika.

Source: AmeSecurities

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