RHB Capital Bhd
Sept 2 (RM6.25)
Maintain hold and a target price (TP) of RM6.25 (9% return on equity, 0.9 times 2016 price by volume chart on RHB Bank Bhd entity) pending further details of the eventual take-up rate of the announced career transition scheme (CTS).

We understand that RHB Capital (RHBCap) has initiated the CTS similar to a mutual separation scheme (MSS) aimed at streamlining its cost structure. The CTS is voluntary in nature but acceptance of the offer lies with the management. We believe that the scheme may be open to the entire group but will need more clarity from the management.

The CTS has been implemented by many other corporates such as Maxis Bhd. It is similar to an MSS, but does provide an option for a staff member to be retrained and transferred into other divisions within the organisation that requires a headcount, if the staff member opts for a transfer. 

However, the ultimate aim of such a scheme is to refine its headcount structure in line with its more streamlined organisation structure, and hence we would view it highly to an MSS. 

The other part of the transition begins when an individual’s employment ends with one company and the transition is over when the individual achieves either re-employment with another organisation, self-employment or retirement. 

Career transition services are designed to help the staff during the transition time from one position to the next. This assistance will include current career and job search information, and individual consultation to help the staff successfully manage the career transition period.

We are not entirely surprised by this announcement as the group has consistently missed its aspiration to bring its cost-to-income ratio below 50% from its current 56%. 

Note that in spite of better cost discipline in its recent second quarter financial year 2015 (2QFY15) results, (+5% year-on-year [y-o-y] versus historical run rates of +10%  to +14%), 2Q15 cost-to-income ratio rose to 56.3% (versus 1Q15: 54.3% and 2Q14: 55.2%) as revenue trends remain muted. Inherent in our forecast is a 4% y-o-y contraction in revenue growth for FY15.

The group has roughly 18,000 employees while RHB Investment Bank Bhd itself has 4,000 employees. 

Assuming a slightly lower take-up rate of 8% versus the 11% that CIMB Group Holdings Bhd and PT CIMB Niaga Tbk achieved from its MSS given the marked deterioration in macroeconomic sentiments over the past five months, we estimate that RHBCap may be able to achieve total annual cost savings of RM160 million per annum from the proposed CTS, equivalent to 4.8% of total operating costs and 6% of net profit. 

Inherent in our assumptions are: i) 1.25 months of payout/year of service; ii) eventual approved take-up rate count of 1,400 employees; iii) average monthly staff cost of RM9,300 per employee; and iv) 10 years of average length of service/employee for those who will opt for the voluntary separation scheme. This could result in the group incurring one-off CTS restructuring costs of RM166 million. 

The group’s cost-to-income ratio may potentially decline from our current 55% estimate for FY16 to 53% and return on equity (ROE) would be enhanced by 40 basis points to 9.40%. 

Consequently our current ex-all rights TP may increase from RM6.25 to RM6.80. This would imply a one time FY16 price-to-book multiple on its soon-to-be newly listed RHB Bank entity based on FY16 forecast ROE assumption of 9.4%. 

Assuming the rights price is fixed at a 20% discount to prevailing theoretical ex- rights price, RHBCap is currently trading at an implied theoretical ex-price of RM6.30 which is close to our current ex-all rights TP of RM6.25. — UOB KayHian, Sept 2

This article first appeared in digitaledge Daily, on September 3, 2015.