RHB Capital - To be privatised?

News  A media report has speculated that in an effort to create better value and improve tax efficiency, there has been a proposal to restructure RHB Capital Bhd (“RHBCAP”) in an exercise that will lead to its privatisation. The report said that the extensive proposals suggested that RHB Bank be re-listed later and the banking group be enlarged with the subsequent injection of Malaysia Building Society Bhd (“MBSB”) at a later stage. The rationale for the proposal is to prepare the group to meet the changes in the upcoming new Financial Services Act (“FSA”).

 However, the report added that the timing of the restructuring, and whether the major shareholders of the group, including the EPF, are agreeable to the proposal, remained unknown.

Comments  While we view the news of the potential privatisation of RHBCAP positively, we are skeptical that the rationale for such proposal. However, the news supports our arguments that RHBCAP has been a huge laggard with a high discount in its valuations. We like the group’s undemanding valuations. RHBCAP’s valuations still stand out from its peers as it, for example, trades at just 1.3x BV as compared to its long-term average of 1.8x despite having enjoyed a 20% rally since October 2012.

 In our view, the current price of RHBCAP is still ignoring its high sustainable ROE of 13% and its growth potential as a real challenger to the market leaders.

Outlook  We are maintaining our optimistic earnings expectations (EPS growth rate of 8.5% for FY13).

 Recall that the group has unveiled its 2013 KPI target with a ROE of 13% on an enlarged shareholders fund base. We believe the group should be able to achieve its full-year ROE target of 13% judging by its determination in extracting synergies from its merger with OSKIB and containing its cost-to-income ratio to 50% or less.

 The group is also well-positioned for a 12% loans growth in the near future with the focus on growing its ASB financing, SME loans and Corporate loans. In addition, as the group focuses on broad-based lending, this strategy should help to bring down its gross impairment ratio to 2.9% and its credit cost of 25-30bps in FY13.

 The merger with OSKIB will be strategically an ideal fit for RHBCAP in our view. The move will add a significant diversification of its clienteles and scale in the capital markets and an immediate access for RHBCAP into the other Asean markets.

Forecast  No earnings impact.

Rating   MAINTAIN OUTPERFORM

Valuation  We reiterate our OUTPERFORM rating on RHBCAP with a new target price of RM9.00 based on a higher targeted FY13 price-to-book multiple of 1.4x, which is a minimum price-to-book multiple in the event of M&A.

We do expect RHBCAP’s share price to remain strong on the back of this privatisation speculation.

Risks  An unexpected slowdown in fee incomes.

Source: Kenanga