RHB, AmBank reverse gains as investors remain lukewarm to merger talks

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KUALA LUMPUR (June 2): Shares of RHB Bank Bhd and AMMB Holdings Bhd (AmBank) reversed their earlier gains at mid-morning today after investors turned lukewarm on the merger talks between the banks, underpinned by a neutral outlook by analysts who have placed a "hold" rating on the stocks.

At 10.40am, RHB Bank fell 2.60% or 14 sen to RM5.25 with 2.73 million shares traded, while AmBank was down 0.19% or one sen to RM5.20 with 3.46 million shares changing hands.

In a note today, Affin Hwang Capital analysts Tan Ei Leen and Loh Jia Ying highlighted that investors' potential reaction could be neutral.

"In our view, as the pricing of the merger is potentially at a 1 time book value, we do not think that there will be a significant reaction to both RHB and AMMB's share prices, given that the expected dilution impact on earnings per share and return on equity will be minimal," they said.

Both the analysts noted that in previous M&A experience and track records, the move to realise cost synergies is the most challenging task and this remains a key concern over the longer term.

"Another stumbling block to the merger could be shareholders' approval as we believe that it would be more challenging on AMMB's side (requiring a 75% approval threshold)," they added.

Affin Hwang maintains "hold" rating on RHB, with a price target at RM5.35, based on 2018E's 0.87 times price to book value multiple.

Meanwhile, AllianceDBS Research has downgraded AmBank to "hold" due to limited upside, but with a higher target price of RM5.40 (from RM5.20).

"RHB highlighted that both banks' valuations are currently trading close to parity at 0.9 times book value and that they are looking to minimise goodwill arising from the transaction, thereby implying a transaction price of 1.0 times book value," it said.

The research house said although the corporate action is one of the potential re-rating catalysts for AmBank, current macro and operating conditions reflect a transaction price valuation of circa 1.0 times book value, thus providing limited upside to AmBank in the near term.