KUALA LUMPUR (Apr 14): While analysts were mostly positive on RHB Capital Bhd (RHBCap)’s proposed internal restructuring and rights issue, the dilutive effect on earnings per share (EPS) — expected to range between 10% and 30% — weighed on its share price today.
RHBCap’s share price fell as much as 3.05% or 25 sen to RM7.95 before closing at RM7.96, with 1.65 million shares done. This translated to a market capitalisation of RM20.48 billion.
RHBCap (fundamental: 1.5; valuation: 2.1) proposed yesterday an internal reorganisation that will see RHB Bank Bhd take over its parent’s listing status. The group has also proposed a rights issue of new shares to raise up to RM2.5 billion for its working capital and to meet the requirements of Basel III.
In a note today, CIMB Research analyst Winson Ng estimated that the rights issue will dilute the group’s financial year (FY16) earnings per share (EPS) by 10% to 12%.
However, he said the dilution will be partly offset by tax savings and the withdrawal of the holding-company discount for the valuation of the stock.
“The swap ratio of RHBCap and RHB Bank shares has yet to be determined at this juncture, but we think that investors’ exposure to RHBCap’s business profile will not materially change following the exercise, though all of its business units will be housed under the newly listed entity of RHB Bank,” he added.
Meanwhile, Maybank Investment Bank Research analyst Desmond Ch’ng said the positives of the exercise include an enhanced Common Equity Tier 1 (CET1) ratio of 11% at group level, reduced goodwill from about RM3 billion to RM5.2 billion, improved return on equity (ROE) from about 10.2% to 11.2% for financial year ending Dec 31, 2016 (FY16).
He said that the exercise would eliminate the group’s double leverage problem and reduce interest costs and uplift earnings of about RM120 million per annum.
“On the flip side, we estimate a 29% dilution of FY16 EPS as a result of this exercise,” he added in his note today.
Meanwhile, Hong Leong Investment Bank analyst Low Yee Huap expects the EPS dilution to be about 30% but said there is a potential ROE enhancement of 186 basis points following the completion of the proposals.
He is positive on the proposed exercise despite the EPS dilution as it would enhance profitability and ROE on top of addressing capital issue and inefficiency of the group structure.
He said in a note that the higher ROE and bank holding structure suggest that the new RHB Bank entity could “garner higher valuation and benefit shareholders”.
With the bank holding structure and stronger capital position, he added that there is potential of higher payout and flexibility to increase cash portion.
AllianceDBS analyst Lynette Cheng said while RHBCap's corporate exercise is positive for the group, the research firm was mindful that the Malaysian banking sector remained challenging in 2015 with moderate loan growth.
In her report today, she said she expects the banking sector's net interest margin to be pressured by higher funding cost as capital market slows. Furthermore, it also cited higher credit costs and operating costs due to the goods and services tax as challenges affecting the banking sector.
“Pricing of the rights will be determined later but the management has hinted at a 20% to 30% discount to RHBCap’s share price,” she added.
She estimated the entire corporate exercise would dilute EPS by around 10% but would be ROE accretive (by 1.6 percentage points) because of higher earnings from interest cost-savings and smaller equity base because of lower goodwill.
Most analysts have maintained their earnings forecasts, target price and rating on RHBCap, pending more details.
Yesterday, RHBCap group managing director Kellee Kam said the restructuring would see the group move towards a bank holding company structure in line with major regional banking groups across Association of Southeast Asian Nations.
Kam said the move would also give RHBCap better capital and tax efficiency for profit growth.
The proposals are expected to be completed by the fourth quarter of 2015.
(Note: The Edge Research's fundamental score reflects a company’s profitability and balance sheet strength, calculated based on historical numbers. The valuation score determines if a stock is attractively valued or not, also based on historical numbers. A score of 3 suggests strong fundamentals and attractive valuations.)