Thursday, April 7, 2011

RHB Capital: Dividend Reinvestment Plan (DRP) Priced At RM7.56 & EPF Open To Merger

April 07, 2011
Price Target: RM9.49
Share price: RM8.63


News
# All its 21.38 sen final dividend may be elected under the dividend reinvestment plan (DRP). Issue price of the DRP will be at RM7.56 or 10% discount to ex-dividend VWAP.

# EPF (RHB Cap’s major shareholder)’s CEO denied any merger discussion but said that it is open to such move if it brings good value to shareholders. Newswire reported that ADCB appointed Goldman Sachs Group and Merrill Lynch & Co as advisors for the stake sale.

Financial impact
Assuming all shareholders elect to accept the dividend in shares, its FY11 EPS would be diluted by about 2% while ROE will decline by circa 30bps. The latter will reduce our target price from RM9.49 to RM9.30. However, both its Tier-1 and RWCAR capital ratios for FY11 would be boosted by circa 39bps.

Pros / Cons
Overall positive

Shareholders will benefit as the dividend reinvestment plan (DRP) shares are priced at 12% discount to yesterday’s closing price.

Despite dilution to EPS and ROE (as well as our target price), it will ensure robust capital base and flexibility in rewarding shareholders with higher payout then its official dividend policy of 30%. This dividend reinvestment plan (DRP) will provide additional yield pick-up of 0.26% if investors opted for the DRP rather than the all cash option.

Short-term share overhang as investors may sell ahead of new shares allotment to lock in profits. However, this should be mitigated by M&A excitement as well as ADCB’s intention to sell its 25% stake.

We suspect ADCB is likely to sell its stake entirely to another strategic partner at premium to market price given that it will fetch a better pricing while current price is still valuing RHB Cap as one of the “cheapest” bank in Malaysia despite ROE that is comparable to industry average. A new strategic partner could add more value vis-à-vis- ADCB which has largely been passive since its entry.

Risks
Unexpected jump in impaired loans and lower than expected loan growth as well as impact from Basel III.

Rating
BUY <- ->


Positives:
ROE at industry average but valuations among the lowest (see Figure 1) vs. larger peers; Transformation bearing fruits, reflected in strong loan growth and improving asset quality; “Easy” contributing to higher market share in retail segment; and potential of the tie-up with Pos Malaysia.

Negatives:
Lack of liquidity.

Valuation
Target price unchanged at RM9.49 based on Gordon Growth with ROE of 15.2% and WACC of 9.3%.

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