RHB Capital - Favourable terms for OSKIB acquisition BUY

- We maintain our BUY rating on RHB Capital Bhd (RHB Cap), with an unchanged fair value of RM8.50/share. This is pegged to a lower fair P/BV of 1.45x (vs. 1.5x previously) based on a lower ROE of 12.9% (13.2% earlier) but on a higher book value of RM5.90 (RM5.73 earlier) for FY12F.

- RHB Cap has announced the acquisition of OSK Investment Bank (OSKIB) for a total consideration of RM1,950.7mil, to be satisfied by RM147.5mil in cash and the issuance of 245mil new RHB Cap shares at an issue price of RM7.36/share. In addition, RHB Cap is also acquiring a 20% stake in OSK Trustees Bhd, 20% equity interest in Malaysian Trustees Bhd, 100% of OSK Investment Bank (Labuan) Ltd and a 59.95% stake in Finexasia.com Sdn Bhd, for a total of RM39.3mil. The total acquisition price is therefore RM1,990mil. 

- This is lower than the earlier expectations of between RM2.2bil and RM2.5bil. In addition, the P/BV for the acquisition works out to 1.77x based on OSKIB’s book value as at 30 September 2011. This is below our earlier estimated 2x, which is positive. 

- Synergies are expected to be derived from expanded revenue-generation capabilities as well as lower cost of funding. There is already early evidence of enhanced fee-income generation capability, with earlier collaborations between RHB and OSKIB leading to both parties bagging three major mandates since January 2012. (These are Wilmar International Ltd’s SGD5bil bonds in January 2012; (b) Berjaya Sports Toto’s share placement in April 2012; and (c) Otto Marine Ltd’s 1-for-2 rights issue in April 2012).

- We have revised upwards earnings by 5.1% FY12F, 3.0% FY13F and 2.9% FY14F, taking into account this acquisition and latest results. Our earnings are upgraded, mainly assuming additional RM50mil fee income p.a. from the acquisition of OSK, as well as lower credit costs of 49bps FY12F from 54bps previously given confirmation of adoption of full FRS139 in 1QFY12. (Without these two earnings changes, the impact from the acquisition to earnings is neutral). ROE is revised to 12.9% FY12F from 13.2% previously to take into account the higher equity base arising from the new share issue. 

- 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