RHB Cap - OUTPERFORM - A complex merger?

We continue to maintain our OUTPERFORM rating on the stock and reiterate our view that value is emerging for RHBCAP at the current level. We recommend investors to bottom-fish the stock into any dips. RHBCAP has been outperforming KLFIN by 3.2% since Feb2012, despite its weaker result announcement, and this suggests the stock has limited downside.  We are maintaining our target price of RM9.80 for the stock based on a targeted FY12 P/BV multiple of 1.7x, being a 19% discount to big-mid cap banks average of 2.1x. RHBCAP stands out from its peers as it currently trades at just 1.36x to its FY12 BV of RM5.66.  

RHB-OSK merger sees delay.  Top officials from RHBCAP and OSKIB are reported to share similar views as they spoke at separate press conferences after the AGMs of their respective companies. According to media reports, the search for a “neutral” investment banking head and the need to iron out other “political and management” issues have been cited by the management of both companies as the main reasons for the delay in concluding the merger between RHBCAP and OSKIB.  Other challenges of the merger cited include securing the necessary approvals from both the local and overseas regulators. RHBCAP’s management is however eyeing to conclude the merger by the 3Q of 2012, a delay from 1Q2012.

Our views.  We believe that the key challenge of the proposed merger could be the culture shock present in the merged entity, as both investment banks have been operating under different business models for a long time. RHBCAP operates under a conservative  approach  while  OSKIB  is  more  of  an  entrepreneurdriven  IB  that  is  more  aggressive  towards  risk-taking.  From  what was reported in the news, we understand that both sides have not agreed on the new management team structure of the merged entity as well as the key personnel to head the merged entity’s divisions. As a result, we believe Bank Negara Malaysia will not grant the green light for the proposed merger yet unless the issues of management structure and personnel are ironed out by both parties. We continue to view the merger positively. We believe OSKIB is strategically an ideal fit for RHBCAP and will add a significant diversification of clienteles and scale in the capital market and also provide an immediate access for RHBCAP into other Asean markets. The proposed merger should be earnings accretive over the medium to long term.  

However, there are near term concerns i.e. 1) the purchase price of 1.2x-1.6x BV is not cheap; 2) RHBCAP could increase its capital ratio via the issuance of new shares and this could lead to a dilution and 3) the risk of greater-than-expected loss rate in its lending portfolio. While there is a potential impact on earnings dilution due to the above issues, we believe that the share price correction of approximately 34% since its peak has adequately priced in these concerns. In summary, we see the potential RHBCAP acquisition of OSKIB as a highly attractive long-term strategic transaction with the near-term risks fully priced in already.

Source: Kenanga