EPS dilution weighs on RHBCap shares

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KUALA LUMPUR: While analysts were mostly positive about RHB Capital Bhd’s (RHBCap) 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 yesterday.

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 yesterday. This translated into a market capitalisation of RM20.48 billion.

RHBCap (fundamental: 1.5; valuation: 2.1) proposed on Monday 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 yesterday, CIMB Research analyst Winson Ng estimated that the rights issue will dilute the group’s EPS by 10% to 12% for the financial year ending Dec 31, 2016 (FY16).

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 said.

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 RM5.2 billion to RM3 billion, and improved return on equity (ROE) from about 10.2% to 11.2% for FY16.

He said the exercise would eliminate the group’s double leverage problem, 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 said in his note yesterday.

Meanwhile, Hong Leong Investment Bank Research 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 about the proposed exercise despite the EPS dilution as it would enhance profitability and ROE on top of addressing capital issues and inefficiency of the group structure. The higher ROE and bank holding structure suggest that the new RHB Bank entity could “garner higher valuation and benefit shareholders”, he added.

AllianceDBS analyst Lynette Cheng said while RHBCap’s corporate exercise is positive for the group, the research firm is mindful of the Malaysian banking sector remaining challenging in 2015 with moderate loan growth.

She said the banking sector’s net interest margin is expected to be pressured by higher funding cost as capital market slows. She also cited higher credit and operating costs due to the goods and services tax as challenges affecting the banking sector.

Cheng estimated that 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 a smaller equity base because of lower goodwill.

Most analysts have maintained their earnings forecasts, target prices and ratings on RHBCap, pending more details.

Maybank IB Research, however, changed its call on RHBCap from “buy” to “hold”.

On Monday, 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 Asean.  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.

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This article first appeared in The Edge Financial Daily, on April 15, 2015.