AmWatch - CIMB Group : Risk reward trade-off looks favourable for CIMB BUY, 25 Aug 2014

STOCK FOCUS OF THE DAY

CIMB Group : Risk reward trade-off looks favourable for CIMB   BUY

We upgrade CIMB Group Holdings Bhd (CIMB) to BUY with a higher fair value of RM8.20/share (from RM7.30/share for FY14F earlier). This is based on a possible merger scenario of RHB Cap acquiring CIMB. The press reported that RHB Cap could become the holding company if it plans to merge with CIMB and MBSB. It was quoted that one of the routes being considered currently is for CIMB Group to sell off its entire banking business to RHB Cap to be paid by an issuance of new RHB Cap shares.

The press reported that this route is being considered as the shareholders’ approval level is much lower for RHB Cap to buy over CIMB, as it will need only 50% plus one share to approve the deal. To fulfil the aspiration of creating a mega Islamic bank, RHB Islamic Bank will subsequently sell its entire business, in exchange for shares, to CIMB Islamic Bhd.

Our sensitivity indicates that if RHB Cap acquires CIMB at a P/BV of 1.9x, RHB Cap’s possible book value may rise substantially to RM9.18/share. Based on historical trading bands, we believe that RHB Cap’s share price may hold at its possible new book value of RM9.18/share, or a base case P/BV of 1x. Both banking stocks rarely trade below P/BV of 1x.

Assuming a base P/BV of 1x for the enlarged RHB Cap, CIMB may potentially be worth RM8.20/share. Our earlier sensitivity analysis – assuming that CIMB is the acquiring vehicle – indicates a possible CIMB fair value of RM6.60/share based on fair P/BV of 1.2x and a potential book value of RM5.68/share. We believe that this scenario is now widely discounted, and the possible upside for CIMB from this new merger scenario is not yet fully reflected in CIMB’s share price. The risk-reward trade off for CIMB looks increasingly favourable.

Others :

WCT : Crucial push for remainder of 2H  BUY

MRCB : Operational improvements continue      BUY

SapuraKencana : Promising new exploratory well results for SK408           BUY

Guinness Anchor : Innovation and cost savings to support earnings          HOLD

Tan Chong Motor : Massive underperformance SELL

AMMB Holdings : 1QFY15 underpinned by divestment gain          NNO-RATED

QUICK TAKE

Plantation Sector : Newsflow for week 18 – 22 August    NETURAL

NEWS HIGHLIGHTS

Banking Sector : Proposed CIMB, RHB, MBS set to transform finance industry

Construction Sector : HSR for 70pc less