This article first appeared in The Edge Financial Daily, on April 18, 2016.

RHB Capital Bhd
(April 15, RM6.28)
Maintain buy with a target price (TP) of RM7: Post rights issue and reorganisation, RHB Capital Bhd (RHBCap) is expected to have a cleaner structure. Cost savings from its rationalisation exercise, stronger loan growth and improvement in credit cost should also pave the way for a better financial year ending Dec 31, 2016 (FY16) for RHBCap.

With the completion of the rights issue, RHBCap is at the last leg of its corporate restructuring, which should lead to a new lease of life for RHB Banking Group upon completion. 

The proceeds will be used for the settlement of RHBCap’s debt as well as housing RHB Investment Bank Bhd, RHB Islamic Bank Bhd and RHB Insurance Bhd under the main operating entity, RHB Bank Bhd. RHB Bank will then assume the listed status of RHBCap, expected in July 2016. 

The removal of goodwill at RHBCap (from the purchase of a 30% stake in RHB Bank from Khazanah Nasional Bhd in 2007) and lower debt are the key developments to rerate the group’s book value (BV) in 2016.

Loan growth is expected to be modest at 8% in 2016, higher than the 6% in 2015, in the absence of lumpy repayments. The net interest margin will still be a little pressured. Non-interest income could be supported by its asset management business. Credit cost should inch closer to 40 basis points, but the non-performing loan ratio should stay below 2%. The cost-to-income ratio is targeted at below 53%, as cost savings start to kick in. Return on equity (ROE) is targeted at 10%. Lastly, overseas profit contributions are targeted at 10%.

RHBCap is rated a “buy”. Our TP of RM7, which implies 0.9 times FY16 BV, is derived using the Gordon growth model, and is based on a 10% ROE, 11% cost of equity and 4% growth. 

With the restructuring overhang removed, RHBCap should see better share price performance going forward. However, to see a stronger rerating beyond one times BV, a pickup in business growth is needed on a more sustainable basis.

A sustained lull in the capital market may be a drag on non-interest income and earnings. — AllianceDBS Research, April 15