AmWatch - RHB Capital : Evaluating all options for an optimal group structure BUY, 9 Apr 2014

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RHB Capital : Evaluating all options for an optimal group structure             BUY

We maintain BUY on RHB Capital Bhd (RHB Cap), with an unchanged fair value of RM9.30/share. Our fair value is based on an ROE of 11.0% for FY15F, leading to a fair P/BV of 1.2x. 

There were recent press reports which highlighted that RHB Capital (RHB Cap) is exploring an internal reorganisation to eliminate its holding company and directly list its 100%-owned banking unit, RHB Bank Bhd, on Bursa Malaysia. Assuming that RHB Bank is transformed into the new holding company, a bank entity level CET1 ratio will need to be considered.

As there is no further confirmation from the company, we have assumed that RHB Bank’s current capital ratios will be a good reflection of the new bank entity level capital ratios, except for one major adjustment, which is the deduction required for investments in subsidiaries. RHB Bank’s major subsidiaries will be the investment bank and insurance company.

Under this scenario, we find that the fully-loaded CET1 ratio for the bank entity level to be on the low side, at only 6.9%. To beef up the CET1 ratio to 10%, we estimate that this would require a rights issue of up to RM3.3bil. This is much higher than our earlier forecast rights issue of RM1.4bil.

Assuming a rights issue size of RM3.3bil, we estimate that this may involve 510mil new right shares, on a 1-right-for-5-shares basis. With the rights issue, our ROE forecast will be diluted down to 10.3% from 11.0% currently. This leads to a fair P/BV of 1.03x or RM7.90/share.

The company is not able to comment further on the latest press reports.  However, it is in the process of evaluating all options for an optimal structure. The good news is the company is likely aware of market expectations of the size of the potential rights issue being at the RM1bil+ range, and not as high as RM3bil. 

We think the latest information is negative given that the possible rights issue may now be larger than our earlier expectations. But this is offset by some assurance that the company is probably aware of market expectations of the size of the rights issue.

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DISCLAIMER:

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