CIMB Group - Better off without the merger? HOLD, 12 Jan 2015

We maintain our HOLD rating on CIMB Group Holdings Bhd (CIMB) with an unchanged fair value of RM6.85/share. This is based on an ROE of 11.2% for FY15F, and an estimated book value of RM7.93/share for the enlarged merged entity. Our fair P/BV is unchanged at 1.2x FY15F for the merged entity, assuming the merger goes through.

CIMB’s share price has weakened following press reports that there is a high chance the proposed mega merger between CIMB, RHB Capital (RHB Cap) and Malaysia Building Society Bhd (MBSB) may be called off.  We had earlier estimated that our fair value for CIMB to work out to RM5.70/share on a standalone basis. This is based on an ROE of 10.7% and a fair P/BV of 1.2x, for FY15F on standalone book value of RM4.69share for FY15F.

On paper, this looks worse off than CIMB’s merged entity’s book value, given that we estimate CIMB’s P/BV to be around 1x based on circa book value of about RM5.50/share for the merged entity. However, we believe that CIMB may be better off without the merger, given uncertainty over the synergies that may be achieved via the standalone Islamic banking model. Recall that our merged entity’s valuation included an assumption of RM1.2bil synergies from the merger.

Sources to the press added that, given the current operating landscape, the merger is unlikely to achieve the desired synergies, estimated at over RM1bil. Without the synergies, we estimate that the merged entity’s book value to be lower at RM7.80/share, from RM7.90/share. More importantly, ROE is much lower as well at 9.5% instead of 11.2%. This may represent one of the lowest among regional banks.

Without the merger synergies and based purely on the Gordon growth model, the enlarged entity’s fair P/BV works out to only 0.9x, or a fair value of RM6.70/share for the merged entity. And based on a swap ratio of 1 RHB Cap share for every 1.38 CIMB share, CIMB’s fair value is only RM4.80/share, without the synergies. Thus, in essence, we believe that CIMB may be better off without the merger, given rising uncertainty over the realisation of synergies.