Investors uncertain on RHB-AmBank merger

By NG MIN SHEN

The proposed merger between RHB Bank Bhd and AMMB Holdings Bhd (AmBank) saw a mixed response from the market last Friday as early optimism gave way to concern on the value of the deal.

RHB and AmBank opened the market higher at 10 sen each to RM5.49 and RM5.31 respectively, but investors then shot both stocks with RHB easing 20 sen to RM5.19 and AmBank falling 12 sen to RM5.09 at market close, despite the underlying bench-mark FTSE Bursa Malaysia KLCI rising 13.84 points to 1,776.95 as investors bought up rival bank stocks.

Analysts largely remained neutral on both stocks with many concerned with the cost synergies and share-holders’ approval required to complete the deal.

Affin Hwang Investment Bank Bhd noted in a research report that investors’ potential reaction could be neutral.

“As the pricing of the merger is potentially at one times book value, we do not think there will be a significant reaction to both RHB and AmBank’s share prices, given that the expected dilution impact on earnings per share and return on equity (ROE) will be minimal,” it said.

It added that in previous mergers and acquisitions, the move to realise cost synergies had been the most challenging task.

“This remains our key concern over the longer term. Should management not be able to address the cost issues well, we believe there could be a negative investor reaction in the long run.

“Another stumbling block could be the shareholders’ approval, as we believe it would be more challenging on AmBank’s side, which requires a 75% approval threshold,” the report stated.

The research house maintained a ‘Hold’ call on both RHB and AmBank, with a target price (TP) of RM5.35 per share for RHB and RM5.20 per share for AmBank.

RHB and Ambank announced that they had received Bank Negara Malaysia’s (BNM) approval to begin talks for a proposed merger and had entered into an exclusivity agreement expiring Aug 30, 2017, to decide on the terms of the union.

The proposed coalition is aimed at creating a stronger fourth-largest banking group, with RHB said to be proposing an all-share deal to acquire the assets and liabilities of AmBank at a potential pricing based on a single multiple of AmBank’s book value in an all-share deal.

MIDF Amanah Investment Bank Bhd maintained a ‘Neutral’ recommendation on AmBank as details of the merger remain scarce, with an unchanged TP of RM5.55 based on a price-to-book (PB) ratio multiple of one time, its three-year historical average.

“Yet, we do not discount the interest on the stock, which may drive the price ahead of its fundamentals, so investors should look to accumulate on any price weakness,” it said.

MIDF also maintained its ‘Neutral’ stance on RHB’s stock, with an unchanged TP of RM5.65 based on pegging 0.98 times to its FY18 book value of equity per share, the three-year average PB.

Nomura Global Markets Research said RHB and AmBank stock prices are likely to stay supported at an indicative one times PB value, as the share-swap deal is close to current valuations of one times PB.

AllianceDBS Research Sdn Bhd reinstated a ‘Hold’ call on RHB with a TP of RM4.90, while downgrading AmBank to ‘Hold’ from a previous ‘Buy’ stance, though it lifted the TP for AmBank to RM5.40 from RM5.20 previously.

“RHB highlighted that both banks’ valuations are currently trading close to parity at 0.9 times book value and that they are looking to minimise goodwill arising from the transaction, thereby implying a transaction price of one times book value,” it said.

The research firm said although the exercise is a potential re-rating catalyst for AmBank, current macro and operating conditions reflect a transaction price valuation of around one times book value, thus providing limited upside to the bank in the near term.

On the extraction of cost synergies for the merged entity, it noted the domestic branch network comprising RHB’s 208 branches and AmBank’s 175 branches, staff and possible overlap in businesses would need to be assessed.