CIMB (FV RM8.53 - BUY) Corporate News Flash: Going Ahead with RBS Acquisition

Stock Name: CIMB
Company Name: CIMB GROUP HOLDINGS BERHAD

Research House: OSK

Price Call: BUY

Target Price: 8.53

THE BUZZ

CIMB Group has announced the acquisition of a major portionof Royal Bank of Scotland Group PLC's (RBS) cash equities, corporate broking,equity capital markets and merger-and-acquisition (M&A) businesses in Asiafor GBP160.1m (RM782.9m).

OUR TAKE

Propels CIMB investment banking franchise forward.  The acquisition of RBS's investment bankingbusiness, which is ranked among the top 10 franchises in the Asia Pacificregion in terms of market share, will essentially transform the group from the largestinvestment banking franchise in ASEAN to among  the largest in AsiaPacific, thereby allowing the group to compete more effectively for ASEAN-AsiaPacific crossborder regional deal flows. The deal will involve cash equities,equity capital markets and corporate advisory business from RBS in Australia,China, Hong Kong, India, Taiwan, Indonesia, Malaysia, Singapore and Thailand,but excluding Japan and South Korea. The group will have  a  newonshore presence in Australia and Taiwan, and a substantially larger presencein China, Hong Kong, and India. In its key markets, RBS is ranked 5th inAustralia and Top 10 in India in terms of mergers and advisory market share.Although the enlarged CIMB is still small relative to global investment bankingbulge bracket firms which are able to leverage on much larger balance sheetsand global distribution networks, we think that the acquisition of RBS is asmall but an important step for CIMB to gradually achieve its longer-termaspirations of becoming a truly regional universal bank. We see strategicparallels with the group's acquisition of GK Goh back in 2005 which wasimportant in cementing its existing market-leading ASEAN investment bankingfranchise. With the acquisition of RBS, we are hopeful that the longer-termsynergies, arising from its significantly larger geographical reach across AsiaPacific, will eventually bear fruit in the future.

Higher-than-expectedacquisition cost but still fair.  Netof rebates, capital injection and additional capex on system and fixed asset upgrades, the total effective cost of acquisitionfor RBS' Asia Pacific investment banking and cash equities business amounted toRM782.9m, significantly higher than the initial speculated RM152m pricing. Thatsaid, on a valuations perspective it still works out to a reasonable 0.98xP/NTA valuation pricing. We think that strong interest from the likes of Bankof China may have resulted in the group having to raise its pricing. Excludingsynergies, the acquisition is expected to be marginally earnings dilutive (~2%to 3%) given the fact that  the  RBS investment banking and cash equitiesbusiness in Asia Pacific is still largely loss making. Management expects thedeal to be earnings accretive by  thesecond  year of acquisition, dependinglargely on capital market conditions.

Source: OSK188