INDUSTRY OVERVIEW

Evolution                 

The stock-broking industry has evolved over time with certain players moving from universal brokers to investment bank platform in order to secure the flexibility of sourcing cheaper funding from customer deposits and also extending corporate loans to support corporate-advisory activities.

Based on Securities Commission data as at end 2010, the stock-broking industry comprised of 1 universal broker, 6 stock-broking companies with at least 1+1 mergers ("1+1 SBC"), 14 investment banks, 7 foreign stock-broking companies under special scheme and 7 standalone stock-broking companies.

Past Consolidation

Local stockbrokers and investment bankers have continued to consolidate, with mergers involving some of the stand-alone peers. Such consolidation points to an industry shaped by players with access to larger balance sheets and more extensive networks. As highlighted by one recent HwangDBS research report, consolidation among brokers had been apparent with increased competition where valuations benchmarks have been set at between 1.1-1.9x book value over the past 2 years.  

Latest ongoing exercise

HL Cap  (5274)                     

Last: RM6.90

Earlier this year, HLFG has offered to privatize HL Cap via a cash offer of RM1.71/share at around 1x its book value with the aim to house the Investment Bank of HL Cap under the commercial banking arm of HL Bank. However, the shareholding structure of HL Cap resulted its minorities, with savvy investor such as Datuk Yu Kuan Chon of YNH Property Bhd, in the driver seat to set the price for future corporate transactions involving HL Cap in a clash of titans against Tan Sri Quek Leng Chan. HL Cap last closed at RM6.90 /share valuing at 3.8x book value.

HDBS  (6688)                       

Last: RM3.99

Meanwhile, BNM has given 6 months approval for negotiations of a potential merger between HDBS’s financial assets and either AMMB or Affin. TheEdge weekly recently reported Affin has submitted a bid that is 1.2-1.3x book value while AMMB bids at 1.0-1.1x book value. Based on end Jan 2013 book value of RM856.14 mil for HDBS Investment Bank (“HDIB”) itself, that translates to the following value per HDBS share:-

Value of HDIB for HDBS

VALUATION

Other than HL Cap and HDBS which are undergoing M&A, valuation of most stock broking companies and investment banks appears attractively priced below respective book value. Year to date, their share price underperformed relative to those active M&A targets. Industry consolidation is expected to spill over to these laggards and spur up M&A activity.

YTD share price performance of Stock-Broking Companies/Investment Banks

Highlighted in the following table are those potential M&A candidates with sizeable business within stock broking industry ( e.g. TA ) or trading at deep discount to book value and have high net liquid asset level ( e.g. KAF, Insas ).

TA   (4898)

Last: RM 0.65

On 25 Jun 2013, HwangDBS research raised the target price for TA Enterprise Bhd (“TA”) from RM 0.85 to RM 1.00 /share after taking into account:-

• TA’s 60% stake in TA Global valued at approximately RM0.60 /share
• TA’s stock broking and credit lending unit valued at RM0.40 /share based on 1x book value.  

KAF S&G  (5096)            

Last: RM 1.65

KAF Seagroatt & Campbell Bhd (“KAF S&G”) houses the stock broking and nominee services of KAF group of companies. It is effectively 73.33% owned by Datuk Kathijh binti Ahmad, founder of the financial powerhouse of KAF. Notably, KAF S&G has zero gearing. Thus, in addition to tapping its strong cash position of RM0.87 /share, shareholders would also own KAF S&G’s investment in quoted and unquoted securities amounting RM0.98  /share.

Therefore KAF S&G last share price of RM1.65 /share is at a discount not only to its book value of RM1.93 /share but also the combined cash and investment securities of KAF S&G valued at RM 1.85 /share.

Insas  (3379)                

Last: RM0.485

Insas Bhd (“Insas”) principal businesses consist of stock broking [ M&A Securities S/B ], investment holding and trading, project and credit financing, property investment and development, IT consultancy [ Inari Bhd ], manufacturing and trading, car rental, wine merchant, retailer of high fashion products [ Melium Group ] and operators of F&B outlets [ DOME Café ].

Insas reported revenue of RM208.9 mil and pre-tax profit of RM72.2 mil for 9 months ended 31 Mar 2013 compared to revenue of RM173.9 mil and pre-tax profit of RM29.0 mil in previous corresponding period mainly due to higher contributions from investment and IT units.

Trading at deep discount to its book value of RM1.42 per share, Insas is worth at least RM0.65 /share purely based on:-

• Insas financial services units worth RM0.47 /share at 1x book value.
• Insas stake in Inari worth RM0.18 /share [ based on 150.39 mil shares in Inari Bhd at last done of RM0.705 and 60.16 mil warrants of Inari Bhd at last close of RM0.36 ]

The floor value of RM0.65 /share has yet to take into account its other units which are worth as much as RM0.79 /share.