AmResearch

RHB Capital - Dissipating concerns, at depressed crisis valuation BUY

kiasutrader
Publish date: Fri, 04 Dec 2015, 10:16 AM

- We upgrade our rating on RHB Capital Bhd (RHB Cap), to BUY from Hold, with a higher fair value of RM7.00/share (from RM6.30/share). Our fair value is based on a better FY16F ROE of 10.1% (previously 9.6%) for the new RHB Bank which will take over RHB Cap’s listing status. This leads to a higher fair P/BV of 0.97x (from 0.9x), and a higher fair value of RM5.41/RHB Bank share (previously RM4.90).

- Our estimate of the swap ratio for conversion from RHB Cap share into RHB Bank share is unchanged, which is that each RHB Cap share is entitled to 1.287 RHB Bank shares following the proposed holding company restructuring. Thus, apportioning our fair value accordingly for RHB Bank means a higher fair value of RM7.00/share (previously RM6.30/share) for FY16F for every RHB Cap share held currently.

- Based on latest indications from the company, we are assured that RHB Bank’s pro forma balance sheet would essentially not be much affected by any potential change to the rights issue.

- In addition, there is also further assurance on the certainty of indicative swap ratio of RHB Cap shares into RHB Bank shares.

- In terms of our forecast book value and EPS for RHB Bank, we have adjusted upwards our per share data by 1.287, which reflects the portion that RHB Cap’s shareholders are essentially entitled to, if a shareholder were to buy RHB Cap shares today.

- Given the fall in the share price over the past few months, the stock is currently trading at compelling depressed crisis valuation of 0.8x FY16F.

- This is similar to the valuation during the 1997 – 1998 crisis, as well as the more recent 2008 external financial crisis. At the current level, we believe the valuation has priced in a potential jump in impaired loans and credit costs.

- We expect the following catalysts ahead, as concerns dissipate: (a) removal of remaining uncertainty on the number of rights shares to be issued; (b) confirmation of no major changes to swap ratio; (c) confirmation on sufficiency of bank level fully-loaded CET1 ratio. Upgrade to BUY.

Source: AmeSecurities Research - 4 Dec 2015

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