Stock Name: CIMB
Company Name: CIMB GROUP HOLDINGS BERHAD
Research House: OSK
CIMB Group Holdings Bhd
(May 17, RM14.38)
Maintain buy at RM14.50 with target price of RM15.75: CIMB Niaga is expected to be the group's key growth driver, bolstered by Indonesia's promising macro growth profile. The group aims to increase profit before tax (PBT) contribution from CIMB Niaga from 21% currently to 42% by 2014.
As such, raising its stake in CIMB Niaga at the current inflection point of CIMB Niaga's potentially strong earnings delivery trend over the foreseeable future ensures that the group does not overpay if it increased its stake at a later stage and also serves to help achieve its aggressive targeted profit contribution from CIMB Niaga.
Khazanah's 19.67% stake in CIMB Niaga is being priced at a relatively attractive 2.4 times price-to-book value (P/BV), lower than the 2.7 times P/BV that CIMB Niaga acquired PT Bank Lippo for in 2007 and RHBCap's 3.5 times P/BV for its recent acquisition of Bank Mestika. The attractive pricing also helps to mitigate any risk of material losses, assuming the group has to comply with new regulatory changes in Indonesia which may require it to sell down its stake in CIMB Niaga to meet a stipulated free float.
However, we understand that the group is currently not required to meet any specified free float requirement even with a 97.9% stake in CIMB Niaga post-completion of the deal.
Despite the issuance of 134 million new CIMB shares representing a 3.8% increase in its share base at RM14.50 per CIMB share to fund the acquisition, we estimate that the deal would still be marginally EPS (earnings per share) enhancing to CIMB by 0.2% to 0.4%.
This is underpinned by CIMB Niaga's robust earnings growth exceeding 25% and the fact that the new CIMB shares will be issued at a higher 2.5 times P/BV versus the 2.4 times P/BV that the group will be paying for Khazanah's 19.67% CIMB Niaga stake. The EPS accretion will depend on CIMB Niaga's growth trajectory, for which we are looking at 26% earnings growth in FY10. In fact, CIMB Niaga's annualised 1QFY10 numbers are already implying a stronger 32% growth.
We make no changes to our core earnings forecast for FY10 and FY11 pending the completion of the deal. Our Gordon growth derived valuation will remain largely unchanged as the slightly lower ROE (return on equity) of 15.2% (versus current 15.7%) post share issuance, will be compensated by accretion in equity from the new share issuance.
We believe that the group is on track to hit its ROE targets as it rides on a robust capital market and steady net interest margins. The management's ROE targets of 18% to 20% versus our 15.7% and consensus' 16.4% implies that the market may not have factored in any future capital management upside. ' OSK Research, May 17
This article appeared in The Edge Financial Daily, May 18, 2010.
Company Name: CIMB GROUP HOLDINGS BERHAD
Research House: OSK
CIMB Group Holdings Bhd
(May 17, RM14.38)
Maintain buy at RM14.50 with target price of RM15.75: CIMB Niaga is expected to be the group's key growth driver, bolstered by Indonesia's promising macro growth profile. The group aims to increase profit before tax (PBT) contribution from CIMB Niaga from 21% currently to 42% by 2014.
As such, raising its stake in CIMB Niaga at the current inflection point of CIMB Niaga's potentially strong earnings delivery trend over the foreseeable future ensures that the group does not overpay if it increased its stake at a later stage and also serves to help achieve its aggressive targeted profit contribution from CIMB Niaga.
Khazanah's 19.67% stake in CIMB Niaga is being priced at a relatively attractive 2.4 times price-to-book value (P/BV), lower than the 2.7 times P/BV that CIMB Niaga acquired PT Bank Lippo for in 2007 and RHBCap's 3.5 times P/BV for its recent acquisition of Bank Mestika. The attractive pricing also helps to mitigate any risk of material losses, assuming the group has to comply with new regulatory changes in Indonesia which may require it to sell down its stake in CIMB Niaga to meet a stipulated free float.
However, we understand that the group is currently not required to meet any specified free float requirement even with a 97.9% stake in CIMB Niaga post-completion of the deal.
Despite the issuance of 134 million new CIMB shares representing a 3.8% increase in its share base at RM14.50 per CIMB share to fund the acquisition, we estimate that the deal would still be marginally EPS (earnings per share) enhancing to CIMB by 0.2% to 0.4%.
This is underpinned by CIMB Niaga's robust earnings growth exceeding 25% and the fact that the new CIMB shares will be issued at a higher 2.5 times P/BV versus the 2.4 times P/BV that the group will be paying for Khazanah's 19.67% CIMB Niaga stake. The EPS accretion will depend on CIMB Niaga's growth trajectory, for which we are looking at 26% earnings growth in FY10. In fact, CIMB Niaga's annualised 1QFY10 numbers are already implying a stronger 32% growth.
We make no changes to our core earnings forecast for FY10 and FY11 pending the completion of the deal. Our Gordon growth derived valuation will remain largely unchanged as the slightly lower ROE (return on equity) of 15.2% (versus current 15.7%) post share issuance, will be compensated by accretion in equity from the new share issuance.
We believe that the group is on track to hit its ROE targets as it rides on a robust capital market and steady net interest margins. The management's ROE targets of 18% to 20% versus our 15.7% and consensus' 16.4% implies that the market may not have factored in any future capital management upside. ' OSK Research, May 17
This article appeared in The Edge Financial Daily, May 18, 2010.
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