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Sunday, January 13, 2013

Upside seen for RHB Cap


 ALLIANCE Research was one of the first to flag RHB Capital Bhd (RHB Cap) as its top pick for the domestic banking sector last year despite uncertainties around the group's merger with OSK Investment Bank (OSKIB).
Citing several catalysts, including the completion of the acquisition, the research house's banking analyst Cheah King Yoong said at the time that RHB Cap's low valuations were “no longer justified” and it was poised to go from a “market laggard to a market leader, with its shares outperforming many of its banking peers”.
With the merger now signed and sealed, Cheah says he still holds this view.
“We believe investors have been overly conservative on the potential synergistic benefits to be derived from RHB Cap's acquisition of OSKIB,” he explains to StarBizWeek.
Indeed, if there is one thing that stands out in discussions about the company, it is that RHB Cap is one of the cheapest banking stocks around.
But this, depending on whether you see the glass as half full or half empty, could either mean it is trading at attractive valuations or that the market is discounting it for a good reason.
RHB Cap is currently valued at a price-to-book of 1.2 times and price-to-earnings of 9.8 times for its financial year 2013. In comparison, Malayan Banking Bhd (Maybank) and CIMB Group Holdings Bhd command a price-to-book of 1.8 times and 1.9 times and price-to-earnings of 12.5 times and 11.9 times, respectively.
Among the second-tier banks, Hong Leong Bank trades at a forward price-to-book of 2.1 times and price-to-earnings of 14.4 times, and Public Bank at 2.9 times and 13.4 times, according to Bloomberg data.
Analysts say RHB Cap shares have underperformed despite solid earnings report cards so far in the first three quarters of its financial year ended Dec 31, 2012.
Its nine-month results had exceeded expectations, with net profit rising 14.4% to RM487.48mil from RM426.22mil in the previous year, accounting for 81.4% of full-year estimates. Revenue was up 10.6% to RM1.96bil from RM1.77bil.
This was on the back of higher net interest income and lower loan loss provisions. Its gross loans grew at a impressive pace of 12.6%, on an annualised basis, to RM106.6bil, beating the industry average of 11.2%, while deposits expanded 11.3% to RM125.7bil.
Its loan-to-deposit ratio ticked up to 84.8% at end-September.
The firm's annualised return on equity stood at 15%, although this may undershoot management's 14% target for 2012 by a small margin because of the enlarged share base.
RHB Cap shares gained 5.2% last year, while Maybank saw its stock rise 10.3%, CIMB 5.4%, Hong Leong 37.4%, and Public Bank 23.7%.
The sceptics opine that the merger with OSKIB was skewed in favour of the latter's shareholders, a move that will dilute earnings and water down its return on equity for at least the next few quarters.
RHB Cap had in November issued 245 million new shares, or 10% of its enlarged share base, at RM7.36 each, which formed the bulk of its settlement with OSK Holdings Bhd. The cash portion was RM147.5mil, giving the entire purchase a price tag of RM1.95bil. OSK Holdings will remain a listed entity.
The acquisition valued OSKIB at 1.77 times price-to-book and 18.9 times historical price-to-earnings, and saw OSK Holdings emerge as RHB Cap's third-largest shareholder behind Abu Dhabi's Aabar Investments PJSC and the Employees Provident Fund (EPF).
OSK Holdings will also get a board seat each on RHB Cap, RHB Bank and RHB Investment Bank.
In addition, Maybank IB Research thinks RHB Cap shares could be reflecting a potential merger with Malaysia Building Society Bhd (MBSB). “This possibility cannot be ruled out,” it notes in a report.
StarBiz had previously reported that MBSB could be privatised and merged with RHB Bank as both are majority-owned by the EPF.
To Alliance's Cheah, the negativity around RHB Cap can only mean there is plenty of upside.
He also deems the anticipated acquisition of a stake in Indonesia's PT Bank Mestika Dharma would be a strategic move for the group to entrench its position in the lucrative Indonesian market.
“Although the market is concerned that RHB Cap may overpay for Bank Mestika, we believe it will be priced reasonably,” he says, pointing out that the unlisted Bank Mestika's product range is currently underutilised.
RHB Cap had originally proposed to buy 80% of Bank Mestika in 2009 for RM1.16bil, but regulatory changes by Indonesia's central bank to limit foreign ownership to 40% had delayed its plans.
RHB Bank and Bank Mestika now have until Jan 31 to ink the conditional sale and purchase agreement.
“RHB Cap remains committed to securing a presence in Indonesia and is willing to take the first 40% stake pending further discussions with regulators,” HwangDBS Vickers Research explains in a client note recently.
Maybank IB Research also points out that the halving of its purchase effectively shrinks any rights issue that could be carried out to fund it.
Meanwhile, it is up in the air as to whether RHB Cap will benefit from any merger and acquisition (M&A) play this year. In 2011 it was pursued by both Maybank and CIMB, a deal that was scuppered when Aabar Investments paid RM10.80 per share or 2.25 times book value for a 25% block in RHB Cap from its sister company Abu Dhabi Commercial Bank.
Still, a market watcher contends that Aabar Investments could yet pare down its shares if market talk is to be believed.
Of more immediate focus is how the consolidation between RHB Cap and OSK IB will pan out. Already, industry observers say the usual teething problems are making their presence felt while management maintains that attrition has been minimal.
The market will also be waiting to scrutinise the synergies that are to be extracted from the merger, which RHB Cap has quantified at RM324mil over the next three years, most of which is expected to be recognised in the third year.
The opportunities from cross-selling, a stronger IB presence and expanded retail and commercial offerings could wring in some RM275mil, cost savings and network alignment RM34mil and lower cost of credit RM15mil. Integration costs are estimated at RM86mil.
And in light of the slower loan growth forecast this year of between 10%-11% versus 11%-12% in 2012, Alliance's Cheah believes the key near-term earnings driver for RHB Cap will be non-interest income, such as fees from the disbursement of Economic Transformation Programme-related bonds and the continued robust capital markets.

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