Analysts are neutral on three way merger of RHB-CIMB-MBSB

PETALING JAYA: Analysts are generally neutral on the merger between CIMB Group Holdings Bhd, RHB Capital Bhd and Malaysia Building Society Bhd (MBSB) despite it's a long-term positive as it has a longer gestation period.
MBSB, however, is seen to be the outright winner, considering that the offer price of RM2.80 per share is much higher than analysts' expectations.
PublicInvest Research opined that the merger is a win-win situation for all and Aabar Investments is unlikely to "throw a spanner in the works" as its inconsequential "loss" will be more than adequately made up from the earnings growth potential of the combined entity given that of the 58 sen dividend it received in recent years.
AllianceDBS Research concurs and is of the view that under this method of acquisition with RHB as the acquirer, which will only require 50+1% vote at the shareholders meeting, concerns over the objection of Aabar Investments have been removed.
Post-merger, the Employees Provident Fund (EPF) will still be the single largest shareholder with a 22.6% stake, followed by Khazanah Nasional 20.5%, Aabar Investments 6.3% (from 21.2%) and OSK 3%.
PublicInvest Research is positive on the deal, but it is lowering its call on CIMB to "neutral", with the target price capped at RM7.27.
Maybank Research said the deal is neutral on CIMB, with estimated lower return on equity (ROE) from 12.3% to 11.4% in FY15.
The research house has maintained a "hold" call on CIMB, while RHB has been upgraded to "buy", with a higher target price of RM10.45.
Kenanga Research estimates earnings per share of the combined entity will immediately be enhanced by 2% given that MBSB is not purchased directly at RHB level.
However, ROE is expected to fall 3% to 8% on the back of higher price-to-book valuation attached to CIMB, while capital adequacy ratios (CARs) will decline by 2% to 4% as a result of acquisition goodwill.
Over the long-run, Kenanga Research said potential synergies from the merger are seen to outweigh the dis-synergies, including economies of scale, the creation of a new growth engine – an enlarged Islamic bank with strength in micro-financing, coupled with an increased retail presence in Singapore via RHB.
Potential dis-synergies, meanwhile include an overlap in the wholesale banking business and higher cost-to-income ratio as a result of sticky costs due to inflated workforce and duplication in operations.
"It is envisioned that the potential synergies are – 86% from cost and 14% from revenue," it added.
Hong Leong Research said even though the merger creates scale and formidable regional banking group with Islamic operation the new driver, there are short-term pains in terms of ROE dilution, integration cost and overlaps.
The research house is neutral on CIMB as it is valued at near current market price despite it will become stronger entity domestically and regionally in the longer term, whereas RHB has set a new valuation benchmark.
"Thus, we are maintaining our "buy" rating on RHB with an unchanged target price of RM10.00 and "hold" rating on CIMB with an unchanged target price of RM7.22," it said.
Trading in shares of the three financial institutions resumed last Friday. MBSB's share price rose 26 sen or 10.97% to RM2.63, RHB climbed 18 sen or 2.07% to RM8.80, but CIMB was down 32 sen or 4.58% to RM6.66.