This article first appeared in The Edge Financial Daily on December 16, 2019

RHB Bank Bhd
(Dec 13, RM5.59)
Maintain buy with an unchanged target price (TP) of RM6.45: RHB Bank Bhd announced on Bursa Malaysia that it had ended talks with Tokio Marine to dispose of the 94.7% stake in its insurance arm.

It is unfortunate that both sides were unable to come to an agreement. Recall, we initially welcome the potential sale effort considering RHB can then focus more on growing its core banking businesses.

Also, we estimated RHB stands to book in disposal gain of RM700 million to RM800 million (using December 2018’s data), assuming management was able to fetch 2.35 times price-to-book value (PBV) for its insurance unit (in line with the historical average merger and acquisition transaction involving Malaysian insurers).

Nevertheless, we are unperturbed by the negotiation outcome as: i) RHB would not need to find ways to plug the profit gap left by its insurance unit which is around 2% to 3% of its earnings (if the deal materialised); and ii) it was not made worse off versus its original state.

We retain “buy” and Gordon growth model (GGM)-based TP of RM6.45, based on 0.99 times 2020 PBV with assumptions of 9.6% return on equity (ROE), 9.7% cost of equity, and 3% long-term growth.

This is largely in line with its five-year average of 0.90 times and the sector’s one time. In our opinion, the valuation is fair, seeing RHB’s current ROE generation is similar to its five-year mean and sector average.

We continue to like the stock for its appealing risk-reward profile given strong common equity tier one ratio of 16.9% (versus sector’s 13.8%), which permits the ability to divvy even more; we note that RHB’s current dividend payout ratio of 40% is still below the sector average of 45%.

Also, it is one of the very few domestic banks now with the ability to churn out decent profit growth rate (3% versus sector: Flat). — Hong Leong Investment Bank Research, Dec 13