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Shares slip, mixed views on Public Bank’s proposed rights issue

Posted on May 1, 2014, Thursday

KUCHING: Public Bank Bhd (Public Bank) saw its shares dropping 14 sen or 0.69 per cent yesterday to close at RM20.02 per share after the group’s proposed rights issue.

There were also mixed views amongst analysts with some believing it will not be dilutive while others expect it to have a dilutive impact on the group’s earnings per share (EPS) and return on equity (ROE).

According to the research arm of Kenanga Investment Bank Bhd (Kenanga Research), while the entitlement basis and issue price have yet to be determined, it believes the proposed rights issue will not be dilutive.

For illustration purpose, it said based on the existing share base of 3.5 billion shares, the capital outlay required by an entitled shareholder holding 1,000 shares in Public Bank is approximately RM1,430.

“As such, we reckon that the proposed rights issue can be done easily on a basis of one new share for 10 existing shares. With this assumption, the issue price could be fixed at RM14.30, representing a 29 per cent discount to a previous closing price,” the research arm said.

It did, however, note that assuming a rights issue basis of 1:10, EPS of the Group could be diluted by 10 per cent post rights issuance.

“Likewise, our dividend per share (DPS) estimates are likely to be revised down by 10 per cent due to a larger share base as we continue to maintain our dividend payout ratio of 45 per cent,” Kenanga Research said.

That said, it pointed out that book value will increase RM1.43 per share, in line with the Common Equity Tier 1 (CET1) ratio. As at end-March 2014, CET1 ratio stood at 8.5 per cent.

“With the additional gross proceeds of RM5 billion, the ratio could strengthen to 10.6 per cent,” the research arm added.

As for the ROE of the Group, it may not be able to achieve management target of more than 20 per cent. The research arm pointed out that as at end-March 2014, the annualised ROE was 19.9 per cent.

“The ROE would decline to 17.8 per cent post issuance of rights issue,” it noted.

Overall, it made no change to its net earnings estimates of RM4,268.1 million and RM4,719.6 million for financial year 2014 estimate (FY14E) and FY15E, respectively.

Similarly, the research arm of MIDF Amanah Investment Bank Bhd (MIDF Research), made no changes to its net profit forecast for FY14 and FY15.

“However, our EPS for FY14 and FY15 have been revised downwards to factor in additional shares in issue after the Rights Issue exercise,” the research arm said.

It affirmed that the proposed Rights Issue will have a dilutive impact on the Group’s EPS and ROE.

“With a higher share capital, the estimated impact on its ROE is substantial post Rights Issue.

“On the flipside, its book value of equity per share (BVPS) will be enhanced by 10.9 per cent and 8.8 per cent respectively for FY14 and FY15 based on our estimates,” the research arm projected.

Overall, it opined that this exercise will strengthen the capital position as well as prepare the Group for the potential countercyclical capital buffer which is likely to be introduced later and be required by regulatory authority.

“The stock continues to trade at a rich valuation compared to peers at PB multiple of 2.8-fold to our FY14 BVPS,” the research arm added.

In view of the slowdown in mortgage loan growth, which is the key strength of group, coupled with the expectation of lower ROEs moving forward from its higher shareholders funds, MIDF Research thus remained ‘neutral’ on the stock.

“As our valuation methodology is price-book value (PBV), the rights issue exercise will enhance the Group’s BVPS. For now, we have imputed into our forecast an enlarged 3,882.14 shares assuming a rights price of RM14.20,” it said.

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