May 24, 2010

EONCAP - EONCap still a hold, says Maybank IB

Stock Name: EONCAP
Company Name: EON CAPITAL BHD
Research House: MAYBANK

EON Capital Bhd (EONCap)
(May 21, RM6.92)
Maintain hold at RM6.92 with target price of RM7.20
: EONCap's board of directors will put Hong Leong Bank's (HLB) RM5.06 billion offer to a shareholders' vote despite the opinion from independent financial adviser Credit Suisse Securities (Malaysia) Sdn Bhd that the offer price is not fair. EONCap will also table a proposal for the RM5.06 billion cash proceeds to be distributed back to EONCap's shareholders via a special dividend and capital repayment.

Credit Suisse's opinion letter will be included in a circular to shareholders. The board's main arguments favouring HLB's proposal are: (i) the domestic banking sector's evolving landscape, including sector liberalisation and a potential new capital requirement framework which will further drive consolidation in the sector, (ii) rising competition from new foreign players, which will further compress banks' margins, and (iii) the absence of an alternative bidder.

EONCap's board has proposed a special dividend of RM3.3 billion and capital repayment of RM1.76 billion to shareholders, after the proposed sale of EONCap's assets and liabilities to HLB. This proposal puts to rest concerns on EONCap's intention for the cash proceeds. EONCap's paid-up capital will consequently be reduced to two shares, from 693.2 million now. The proposed special dividend is expected to be completed within one month from the completion of the proposed disposal, while the capital repayment will be completed by end-2010.

As we had highlighted earlier, the sale of EONCap's assets and liabilities requires only a simple majority vote at a shareholders' EGM. EPF and Khazanah's votes (holding a combined 22%) are therefore critical in light of Credit Suisse's opinion on the pricing. We think that Rin Kei Mei and Tiong Hiew King who hold 15.5% and 17.1% respectively will still vote in favour of the sale to HLB.

Our view remains, that HLB's offer is low at 1.42 times book (2009), without incorporating a sufficient take-over premium for the takeover of a business in its entirety. With only a 5% upside to the implied takeover price of RM7.30 per share by HLB, we also retain our hold call on the stock. ' Maybank IB Research, May 21


This article appeared in The Edge Financial Daily, May 24, 2010.

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