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This article first appeared in The Edge Financial Daily, on December 7, 2015.

 

RHB Capital Bhd
(Dec 4, RM6)
Upgrade to buy with a higher fair value of RM7:
We upgrade our rating on RHB Capital Bhd (RHBCap) to “buy” from “hold”, with a higher fair value of RM7 per share (from RM6.30 per share previously).

Our fair value is based on a better financial year ending Dec 31, 2016 (FY16F) (forecast) return on equity of 10.1% (previously 9.6%) for the new RHB Bank Bhd, which will take over RHBCap’s listing status. This leads to a higher fair price-to-book value of 0.97 times (from 0.9 times), and a higher fair value of RM5.41 per RHB Bank share (previously RM4.90). 

Our estimate of the swap ratio for conversion from RHBCap shares into RHB Bank shares is unchanged, which is that each RHBCap share is entitled to 1.287 RHB Bank shares, following the proposed holding company restructuring. Thus, apportioning our fair value accordingly for RHB Bank means a higher fair value of RM7 per share (previously RM6.30 per share) for FY16F for every RHBCap share held currently.

Based on the latest indications from the company, we are assured that RHB Bank’s pro forma balance sheet would essentially not be much affected by any potential change to the rights issue. In addition, there is also further assurance of the certainty of the indicative swap ratio of RHBCap shares into RHB Bank shares. 

In terms of our forecast book value and earnings per share for RHB Bank, we have adjusted upwards our per share data by 1.287, which reflects the portion that RHBCap shareholders are essentially entitled to — if a shareholder were to buy RHBCap shares today.

Given the fall in its share price over the past few months, the stock is currently trading at a compelling depressed crisis valuation of 0.8 times (FY16F). This is similar to the valuation during the 1997 to 1998 crisis, as well as the more recent 2008 external financial crisis. At the current level, we believe that the valuation has priced in a potential jump in impaired loans and credit costs. 

We expect the following catalysts ahead: Concerns dissipate with the removal of remaining uncertainty about the number of rights shares to be issued; confirmation of no major changes to the swap ratio; and confirmation of the sufficiency of the bank-level fully-loaded common equity tier-1 ratio. We upgrade our call on RHBCap to “buy”. — AmResearch, Dec 4

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