AmWatch - Public Bank : A digestible rights issue HOLD, 30 Apr 2014

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Public Bank : A digestible rights issue      HOLD

We maintain our HOLD rating on Public Bank Bhd (PBB), with a higher fair value of RM21.10/share (vs. RM19.80 previously).

This is based on a lower ROE of 19.2% (from 21.1%) for FY14F, and a lower fair P/BV of 2.7x (from 3.0x previously), due mainly to the expanded equity base from the rights issue. However, our book value forecast is now higher at RM7.86/share (vs. RM6.50 previously), leading to the higher fair value.

PBB has announced a proposal to undertake a rights issue to raise gross proceeds of RM5bil. The company said that this is for working capital and general banking purposes. The rights price and basis have not been fixed yet, but for illustrative purposes, the company indicated that the illustrative issue price for the rights issue would be at RM14.20, based on approximately 350.21mil rights issue. This works out to be 1-right-for-every-10-shares basis, based on our estimates.  

The proposed rights issue is not a major surprise, given that the group had indicated earlier that it was very likely to undertake a rights issue to meet possible new counter-cyclical buffer requirement by 2016. We estimate that the group’s CET1 ratio will be boosted to a comfortable 10.4% by end-FY14, from our previous forecast of 8.3%.

As for its latest 1QFY14 results recently released, we estimate that the group’s CET1 ratio will increase to 10.97% on a pro-forma basis, from 8.53% on a pro-forma basis. We are positive on the rights issue, given that the rights issue’s price of RM14.20 looks attractive. The rights issue basis is also very digestible, given that it is on a 1-right-for-10-shares basis.

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