AmWatch - RHB Capital : Slowing revenue trend in line with industry HOLD, 11 Aug 2015

STOCK FOCUS OF THE DAY

RHB Capital : Slowing revenue trend in line with industry               HOLD

We maintain HOLD on RHB Capital Bhd (RHB Cap), with a lower fair value of RM7.40/share (from RM7.80/share previously). Our fair value is based on a lower ROE of 10.7% (previously 11.0%) for the new RHB Bank which will take over RHB Cap’s listing status. This follows a 2.6% downgrade in our net earnings as we have fine-tuned our forecasts following our company visit.

Our latest projected ROE leads to a lower fair P/BV of 1.1x (previously 1.2x), and lower fair value of RM5.65/share (previously RM5.94/share) for the new RHB Bank listed vehicle. Recall that we had earlier estimated that each RHB Cap share is entitled to 1.31 RHB Bank share following the proposed restructuring. Thus, apportioning our fair value accordingly for RHB Bank means a fair value of RM7.40/share (previously RM7.80/share) for every RHB Cap share held currently. From our latest company visit, we believe the company is likely to have experienced slower requests and demand from the corporate and mid-market segments. This is in line with industry trend.

Elsewhere we believe the company had seen some pockets of weakness in its asset quality, although these are not considered to be indicative of any portfolio-wide deterioration yet. There were some SMEs within its portfolio that were classified with impaired status. This came about due to overstocking in 1Q, as these SMEs had overestimated the pre-GST demand. Aside from these, we expect some upticks in impaired loans arising from the new classification of rescheduled and restructured (R&R) guidelines. We estimate that these may add on about 1% to its existing impaired loan base of RM2.9bil in 1QFY15, and are therefore quite immaterial. The key new information from the visit, in our view, are the ongoing slowing revenue trend and indication on asset quality. The latest visit is in line with our other company visits in terms of slowing revenue trend, whereby we expect some negative feedback loop going into FY16F arising from softer macro trends.

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