CIMB Group Holdings Bhd
(Oct 29, RM6.43)
Maintain “hold” with a target price (TP) of RM7.60: What was new from our meeting with the management is that some of the excess costs and branches will be transferred to the mega-Islamic bank, and CIMB intends to hold just 51% to 60% of the bank after the CIMB, RHB Capital Bhd (RHBCap) and Malaysia Building Society Bhd (MBSB) merger.

This means that the Islamic bank will operate a hybrid model with branches, instead of a fully leveraged one.

The management also estimates integration cost of about RM1.4 billion with an 80:20 capital expenditure: operating expenditure split. As such, it could be just RM280 million which needs to be immediately expensed off, which is not too far off from our estimate of RM313 million.

Our views of the merger post-meeting are unchanged, as is our financial analysis which had already assumed that CIMB acquires RHBCap from an accounting perspective. We estimate an 11% accretion to financial year 2015 (FY15) earnings per share and a 19% enhancement to book value per share, mitigated by a 0.9 percentage points dilution in FY15 return on equity to 11.4%.

That some of the costs will be transferred to the Islamic bank instead of being rationalised, it is offset by the group’s lower stake in the enlarged entity.

Our TP of RM7.60 is unchanged for now, pegged to a FY15 price-to-book value of 1.35 times. This offers a 22% upside to CIMB’s current share price, but we do already have a “buy” on RHBCap (TP: RM10.45) for exposure to this merger.

Based on the swap ratio of 1.38 CIMB shares for every 1 RHBCap share, CIMB currently provides for slightly cheaper entry, given that at RHBCap’s current share price of RM8.74, CIMB should be valued at RM6.33 (+2% upside to current price). — Maybank Investment Bank Research, Oct 29

This article first appeared in The Edge Financial Daily, on October 30, 2014.