Proposed merger expected to be neutral on CIMB’s FY15 EPS

by **Cals** Wed 16 Jul 2014, 07:29

Business & Markets 2014

Written by Maybank IB Research

Monday, 14 July 2014 09:18

CIMB Group Holdings Bhd
(July 11, RM7.00)
Maintain hold with target price of RM8.00: CIMB, RHB Capital Bhd (RHBCap) and Malaysia Building Society Bhd (MBSB) have obtained Bank Negara Malaysia’s approval to commence discussions with the aim of merging the businesses of both CIMB and RHBCap and creating an enlarged Islamic banking franchise with MBSB.

The three parties have entered into a 90-day exclusivity agreement to negotiate and finalise the pricing, structure and other relevant terms and conditions for a proposed merger of the three entities.

Purely hypothetical at this juncture but assuming a share swap into CIMB shares at the latest closing prices, the deal will cost CIMB RM28 billion and will translate to a share swap of 1.2 CIMB shares for every 1 RHBCap share, and 0.3 CIMB share for every 1 MBSB share.

We estimate the merger to be neutral on CIMB’s financial year 2015 ending Dec 31 (FY15) earnings per share at just 7% post-merger enhancement, and before taking into consideration any integration costs.

As for the impact on CIMB’s FY15 return on equity (as opposed to return on average equity), we estimate a one percentage point dilution to 11.8%. We do, nevertheless, anticipate a 17% increase in the group’s book value per share to RM5.56 post-merger.

Based on the share swap scenarios and assuming CIMB trades up to our target price of RM8.00, the upside is about 10% to RHBCap and MBSB’s share prices. We maintain “hold” on CIMB and RHBCap. — Maybank IB Research, July 11

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This article first appeared in The Edge Financial Daily, on July 14, 2014[/size]