RHB Cap - OUTPERFORM - A complex merger?

Stock Name: RHBCAP
Company Name: RHB CAPITAL BHD

Research House: KENANGA

Price Call: BUY

Target Price: 9.60

We continue to maintain our OUTPERFORM rating on the stockand reiterate our view that value is emerging for RHBCAP at the current level.We recommend investors to bottom-fish the stock into any dips. RHBCAP has beenoutperforming KLFIN by 3.2% since Feb2012, despite its weaker result announcement,and this suggests the stock has limited downside.  We are maintaining our target price of RM9.80for the stock based on a targeted FY12 P/BV multiple of 1.7x, being a 19%discount to big-mid cap banks average of 2.1x. RHBCAP stands out from its peersas it currently trades at just 1.36x to its FY12 BV of RM5.66.  

RHB-OSK merger seesdelay.  Top officials from RHBCAP andOSKIB are reported to share similar views as they spoke at separate pressconferences after the AGMs of their respective companies. According to mediareports, the search for a 'neutral' investment banking head and the need toiron out other 'political and management' issues have been cited by themanagement of both companies as the main reasons for the delay in concludingthe merger between RHBCAP and OSKIB. Other challenges of the merger cited include securing the necessaryapprovals from both the local and overseas regulators. RHBCAP's management is howevereyeing to conclude the merger by the 3Q of 2012, a delay from 1Q2012.

Our views.  We believe that the key challenge of theproposed merger could be the culture shock present in the merged entity, as bothinvestment banks have been operating under different business models for a longtime. RHBCAP operates under a conservative approach  while  OSKIB is  more  of an  entrepreneurdriven  IB that  is  more aggressive  towards  risk-taking. From  what was reported in thenews, we understand that both sides have not agreed on the new management teamstructure of the merged entity as well as the key personnel to head the mergedentity's divisions. As a result, we believe Bank Negara Malaysia will not grantthe green light for the proposed merger yet unless the issues of managementstructure and personnel are ironed out by both parties. We continue to view themerger positively. We believe OSKIB is strategically an ideal fit for RHBCAPand will add a significant diversification of clienteles and scale in thecapital market and also provide an immediate access for RHBCAP into other Aseanmarkets. The proposed merger should be earnings accretive over the medium tolong term.  

However, there are near term concerns i.e. 1) the purchaseprice of 1.2x-1.6x BV is not cheap; 2) RHBCAP could increase its capital ratiovia the issuance of new shares and this could lead to a dilution and 3) therisk of greater-than-expected loss rate in its lending portfolio. While thereis a potential impact on earnings dilution due to the above issues, we believethat the share price correction of approximately 34% since its peak hasadequately priced in these concerns. In summary, we see the potential RHBCAPacquisition of OSKIB as a highly attractive long-term strategic transactionwith the near-term risks fully priced in already.

Source: Kenanga