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Is the tide finally turning for RHBCap?

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Is the tide finally turning for RHBCap? Empty Is the tide finally turning for RHBCap?

Post by Cals Fri 14 Feb 2014, 12:42

Is the tide finally turning for RHBCap?
Business & Markets 2014
Written by Hong Leong Investment Bank   
Friday, 14 February 2014 11:47

RHB Capital Bhd
(Feb 13, RM7.90)
Maintain target price at RM9.59: We gather RHBCap’s fourth quarter ended December (4QFY13) loan base was affected by a large repayment, but excluding this, loan growth is in line with the key performance indicator of 12%. Coupled with sustained non-interest income, preprovision operating profit (PPOP) momentum is intact. Note that its PPOP registered 7.5% and 10.3% quarter-on-quarter (q-o-q) growth in 2QFY13 and 3Q respectively, post legal day one with OSK Investment Bank Bhd on April 13.

However, there will be further provision for the RM409 million steel-related corporate impaired loan. RHBCap had already provided RM43 million in 3Q. The amount of additional provision is uncertain but more than half of the RM409 million is collateralised. So despite the setback, FY13 earnings are expected to meet our and consensus lowered forecasts.

Moving into 2014, the momentum in underlying trends is expected to continue, though we expect slower loan growth due to the various subsidy removals and prudential measures (especially on the property sector).

More importantly, the synergistic benefits from OSK are expected to gain traction. As at December last year, actual synergistic benefits were already 2.5 times ahead of its target of RM62 million. There is still a lot of potential extraction, like cross-selling products to OSK clients and cost rationalisation.

On investment banking revenue, despite a challenging environment, the pipeline is circa double the level in 2013. We believe this is due to the enlarged entity and absence of integration distraction.

We are positive on additional provision in 4Q as it will finally alleviate doubts and RHBCap will move into 2014 with a clean slate.

While the overall sector outlook may not be exciting, we believe RHBCap is different as it is in a position that is clear of lumpy provisions (which should normalise) as well as ready to extract more synergistic benefits. These will help to anchor earnings growth.

Therefore, the lacklustre share price performance in 2013 and year-to-date 2014 is an opportunity as we believe the valuation gap with peers will narrow once the dust on lumpy provision is settled and synergistic benefits gather momentum.

Risks to our call include an unexpected jump in impaired loans and lower than expected loan growth as well as impact from Basel III.

Our forecasts remain unchanged, pending release of FY13 results. Positives are that: (i) valuations are still lagging behind especially after the recent sell-off; (ii) transformation is bearing fruit, reflected in strong loan growth and improving asset quality; (iii) “Easy” contributing to higher market share in the retail segment; and (iv) the tie-up with Pos Malaysia. 

Negatives include a lack of liquidity, short-term dilution from the acquisition of OSK and sentiment towards lumpy provision.

We maintain our target price at RM9.59 based on Gordon Growth with return on equity of 12% and weighted average cost of capital of 10.7%. — Hong Leong Investment Bank, Feb 13
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This article first appeared in The Edge Financial Daily, on February 14, 2014.
Cals
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