KUCHING: RHB Capital Bhd (RHB Capital) is starting anew in 2016, AllianceDBS Research Sdn Bhd (AllianceDBS Research) says, with a cleaner structure post restructuring and focus on business growth.
According to AllianceDBS Research, the two corporate actions – the proposed rights issue and corporate restructuring – should spell a new lease of life for RHB Banking Group upon completion (rights issue to complete by end-December 2015; corporate restructuring by end- first quarter of 2016 (1Q16)).
The research house noted that the rights issue, despite some delay (entitlement date postponed to November 23), should alleviate concerns on RHB Bank requiring any further capital injection with CET1 ratio lifted to circa 11 per cent.
“To reiterate, proceeds from the rights issue by RHB Capital will be injected into RHB Bank as part of the group’s reorganisation plan, which will be used towards settlement of RHB Capital’s debts as well as housing RHB Investment Bank, RHB Islamic and RHB Insurance under the main operating entity, RHB Bank,” it said, adding that RHB Bank will then assume the listed status of RHB Capital.
The removal of goodwill at RHB Capital (from the purchase of a 30 per cent stake in RHB Bank from Khazanah in 2007) and lower debt (pared down using the rights issue proceeds) are key items to re-rate the group’s book value in 2016, which the research house estimated will be enhanced by 13 per cent.
While AllianceDBS Research is expecting that earnings will contract in financial year 2015 (FY15), dented mainly by costs related to the group’s Career Transition Scheme (CTS) as well as higher provisions as a buffer, it said that FY16F will be a better year with all the distractions aside.
“Cost savings from CTS should start trickling in,” it added.
Although the research house continued to conservatively assume net interest margin (NIM) compression albeit by a smaller quantum versus FY15F, it expected a pick-up in loan growth and improved credit costs in FY16F.
Overall, it lowered FY15F earnings by 12 per cent but raised FY16-17F earnings by 7-11 per cent.
Meanwhile, the research house noted that return on equity (ROE) is estimated to head lower to eight per cent in FY15 but should increase to 9.6 per cent in FY16.
“We also expect dividend payout to normalise in FY16F to at least 30 per cent of earnings,” it said.
AllianceDBS Research arrived at a higher target price of RM7.10 per share (from RM6.90 per share) after accounting for earnings revisions, effects of the restructuring and rolling forward its valuation to FY16F.
The research house’s target price implied 0.9-fold FY16 book value (BV) and assumed 10 per cent ROE, 11 per cent cost of equity and four per cent growth.
“With the restructuring overhang removed, RHB Capital should see better share price performance going forward,” it said.