RHBCAP (1066) - RHB Capital Bhd - Assessing the impact of potential rights issue
Target RM10.50 (Stock Rating: ADD)
Based on our analysis, we think that RHBCap will raise a total of RM1bn to RM3bn from a potential rights issue aimed at reducing its gearing at the holding company level. We estimate that the exercise could dilute its FY16 EPS by 4-12%. For now, we retain our DDM-based target price (cost of equity of 11.8%, long-term growth of 4%). Despite the possibility of a rights issue, RHB Capital remains an Add and our top pick for the sector as we are positive on its earnings prospects given the re-rating catalysts of (1) above-industry loan growth, (2) benefits from its IGNITE 17 transformation programme, and (3) swift expansion in Singapore.
What Happened
On 5 Apr 15, we wrote about the possible internal reorganisation of RHB Capital, which could include a rights issue. Our subsequent attempts to gather more information from management have been fruitless as the bank is unable to comment while discussions with Bank Negara about the required capital level are ongoing. Furthermore, the situation is fluid, with various possible forms for the deal. What we know, however, is that the purpose of the rights issue is to pare down debts at the holding company level. In this report, we aim to show the possible impact of the rights issue on RHB Capital’s EPS, based on our own analysis.
What We Think
We estimate that RHB Capital will raise between RM1bn (sufficient to lower its double leverage ratio to 120%) and RM3bn (sufficient to fully pay off debts at its holding company) from the potential rights issue. Based on our simulation, the exercise will dilute RHB Capital’s FY16 EPS by 4-12% given assumptions that (1) the rights issue will raise a total of RM1bn-3bn, (2) the rights will be priced at a 15% discount to the market price, and (3) savings on interest charges will be 4% of debt repayment.
What You Should Do
We advise investors to stay invested in RHB Capital to capitalise on its bright earnings prospects given its robust loan growth and benefits from the IGNITE 17 transformation programme. In the event of a rights issue, our target price will fall to between RM9.30 and RM10.05, based on the potential EPS dilution of 4-12%.
Source: CIMB Daybreak - 08 April 2015
Target RM10.50 (Stock Rating: ADD)
Based on our analysis, we think that RHBCap will raise a total of RM1bn to RM3bn from a potential rights issue aimed at reducing its gearing at the holding company level. We estimate that the exercise could dilute its FY16 EPS by 4-12%. For now, we retain our DDM-based target price (cost of equity of 11.8%, long-term growth of 4%). Despite the possibility of a rights issue, RHB Capital remains an Add and our top pick for the sector as we are positive on its earnings prospects given the re-rating catalysts of (1) above-industry loan growth, (2) benefits from its IGNITE 17 transformation programme, and (3) swift expansion in Singapore.
What Happened
On 5 Apr 15, we wrote about the possible internal reorganisation of RHB Capital, which could include a rights issue. Our subsequent attempts to gather more information from management have been fruitless as the bank is unable to comment while discussions with Bank Negara about the required capital level are ongoing. Furthermore, the situation is fluid, with various possible forms for the deal. What we know, however, is that the purpose of the rights issue is to pare down debts at the holding company level. In this report, we aim to show the possible impact of the rights issue on RHB Capital’s EPS, based on our own analysis.
What We Think
We estimate that RHB Capital will raise between RM1bn (sufficient to lower its double leverage ratio to 120%) and RM3bn (sufficient to fully pay off debts at its holding company) from the potential rights issue. Based on our simulation, the exercise will dilute RHB Capital’s FY16 EPS by 4-12% given assumptions that (1) the rights issue will raise a total of RM1bn-3bn, (2) the rights will be priced at a 15% discount to the market price, and (3) savings on interest charges will be 4% of debt repayment.
What You Should Do
We advise investors to stay invested in RHB Capital to capitalise on its bright earnings prospects given its robust loan growth and benefits from the IGNITE 17 transformation programme. In the event of a rights issue, our target price will fall to between RM9.30 and RM10.05, based on the potential EPS dilution of 4-12%.
Source: CIMB Daybreak - 08 April 2015
