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This article first appeared in The Edge Malaysia Weekly on December 16, 2019 - December 22, 2019

A long-awaited restructuring of the BIMB Holdings Bhd group is set to finally unfold.

On Dec 11, BIMB, which is controlled by Lembaga Tabung Haji (TH), announced a series of proposals that will ultimately see it transfer its listing status to its wholly-owned subsidiary Bank Islam Malaysia Bhd. The transfer will be effected through a share swap scheme.

BIMB will, however, first undertake a private placement of new shares to raise RM800 million to fully settle outstanding sukuk held by TH. It will be an early redemption of the sukuk, which only matures in December 2023. BIMB had, last December, done an early partial redemption of RM609.9 million, helping reduce the outstanding amount.

Investors found cheer in the plan, gauging from their reaction in the stock market. BIMB’s stock rose about 4.2% over the next two days following the announcement, ending at RM4.46 last Friday. Recall that the group had been mulling the listing transfer for over four years now.

“Finally, we got the plan through. Hopefully, the coast is clear and smooth for us to undertake it,” BIMB CEO Mohd Muazzam Mohamed, who is also chief of Bank Islam, tells The Edge in a brief interview. The group will need the approvals of, among others, Bank Negara Malaysia, the Ministry of Finance and all shareholders before proceeding with the plan.

According to Muazzam, TH is not likely to take up the additional shares under the private placement. “At this point in time, they may not. That is the reason why we did not [raise funds] through a rights issue.”

He explains that the main reason TH can’t take up additional shares is to comply with the Islamic Financial Services Act, which does not allow shareholders to have a controlling stake in a financial institution. TH currently has 53.8% equity interest in BIMB.

“The idea is that, through the restructuring, the end-result is that no shareholder has more than 50% in the bank. So, when we issue RM800 million worth of new shares through a private placement and other shareholders come in, TH’s portion will automatically be diluted to 48% to 49%,” he adds.

It is also widely known that TH may not be in a position to acquire more shares as it is in the process of cleaning up its balance sheet after past financial shenanigans were uncovered at the pilgrim fund. New management came on board this year.

Apart from TH, BIMB’s major shareholders currently are the Employees Provident Fund (12.5%), Permodalan Nasional Bhd (5.4%) and Amanah Saham Bumiputera (6.8%).

“We have had positive feedback so far [on the private placement] from our other existing shareholders, the likes of PNB and EPF and so on. So we’re optimisic we can raise the RM800 million. It’s going to be done via book-building,” says Muazzam.

Muazzam says there has also been expresions of interest in the new shares from parties that are not currently shareholders of BIMB. “But of course, if any shareholder were to come in and they were to cross the 5% threshold, then they would need Bank Negara’s approval.”

The book-building will likely be done by March or April next year once BIMB has the necessary approvals for its proposals in place, Muazzam says. “We hope to complete all the proposals by August.”

The restructuring will ultimately result in the group having two separate listed entities on Bursa Malaysia — Bank Islam and Syarikat Takaful Malaysia Keluarga Bhd (STMK). STMK is currently 59.5% owned by BIMB. It will eventually be demerged from the group and will be held directly by BIMB’s shareholders and its other existing shareholders.

Analysts seemed positive on the group restructuring.

For one, it gives shareholders the flexibility to decide whether they want to be exposed to just the banking business via Bank Islam or the takaful business via STMK, or both, through separate companies. At present, investors who buy into BIMB are forced to accept that they have exposure to both the businesses, even though they may have a preference for just one.

Upon the transfer of listing, Bank Islam will emerge as the only pure-play full-fledged Islamic financial institution to be listed in the Asean region.

More importantly, the exercise will help unlock Bank Islam’s value. The bank is significantly undervalued by the market under the present structure.

“Based on STMK’s current market capitalisation, BIMB’s stake in STMK is worth RM2.8 billion, which essentially implies the market is valuing Bank Islam at just 0.83 times its estimated 2019 price-to-book value (PBV) , which significantly undervalues the bank given its above-industry return on equity of 11.3% and loan growth (industry: 10.2% ROE, 1.1 time PBV),” notes UOB Kay Hian Research in a Dec 12 report.

“This implies that not only is the market valuing Bank Islam at a steep PBV discount versus what it should fairly command based on its ROE, it has also not ascribed any shariah scarcity premium as the largest pure-play Islamic listed financial entity. We have ascribed a 2019 PBV of 1.32 times to Bank Islam in our sum-of-the-parts valuation,” the research house adds. It maintained its “buy” call and RM5.28 target price on the stock.

A reorganisation will also enable STMK, which has collaborations with Bank Islam, to pursue bancassurance or bancatakaful partnerships with other players more freely.

Maybank Investment Bank Research thinks shareholders could potentially be rewarded with higher dividends from Bank Islam and STMK on a separate rather than combined basis. “We expect a potential post-restructuring FY2020 yield of about 4.8% as opposed to our current projection of 3.8%,” it says in a report.

On a less rosy note, once the new shares are issued, there will be a temporary dilution to BIMB’s earnings per share (EPS). Most analysts, however, think the long-term benefits of the restructuring exercise outweigh this.

Muazzam says the group continues to target higher-than-industry 7% financing growth this year, and an increase in bottom-line profit from last year. It made a pre-tax profit of RM1.065 billion last year compared with RM948 million in the previous year.

“We are slightly negative on the [restructuring] exercise as we estimate that the share placement will dilute BIMB’s FY2021 EPS by about 5%. It would be a negative impact of 4.9% assuming an issue price at 5% discount to the average market price, and 5.4% assuming an issue price at a 10% discount to the average market price,” says CGS-CIMB Research, which has a “hold” call on the stock.

Among the assumptions it made to its simulation is that the redemption of the sukuk, which has a profit rate of 6.25%, would lead to savings of RM52 million for BIMB in FY2021.

The sukuk, along with rights and warrants, was issued to TH back in December 2013 to fund BIMB’s purchase of the remaining 49% stake in Bank Islam that was held by Dubai Financial Group and TH.

As part of the restructuring, BIMB will undertake a scheme of arrangement to settle its outstanding warrants, whereby warrant holders will be paid a cash consideration for the cancellation of exercise rights. BIMB will also dispose of its entire shareholdings in its stockbroking and leasing subsidiaries to Bank Islam, to be settled in cash. These will be based on their latest audited net asset value.

After these exercises, BIMB’s entire shareholdings in Bank Islam and STMK will be distributed by way of distribution-in-specie to its shareholders. To pave the way for a one-for-one share swap, BIMB will first have to undergo a capital reduction and Bank Islam will undertake a share consolidation so that both their outstanding share bases match.

BIMB’s listing status will then be transferred to Bank Islam.

 

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