This article first appeared in The Edge Financial Daily, on November 20, 2015.

RHB Capital Bhd
(Nov 19, RM5.81)
Maintain buy with an unchanged target price (TP) of RM7.10: Assuming Aabar Investments PJS’ current stake in RHB Capital Bhd (RHBCap) of 21.09% remains as at the rights issue entitlement date (Nov 23), and given the fact that Aabar is only allowed to subscribe up to 15% of its stake for the rights shares, Aabar’s stake post-rights will be reduced to 20.28%.

Excess rights shares which were supposedly entitled to Aabar (31.5 million shares) will be knocked off the entire rights issue size, reducing the number of rights shares to 486 million shares from 518 million shares.

RHBCap’s enlarged share base post-rights would be 3.08 billion shares instead of 3.11 billion shares, while the rights issue proceeds would be RM2.34 billion, instead of RM2.5 billion.

With the reduction in the number of rights shares, post-rights, the stakes of other shareholders will increase: OSK Holdings Bhd’s (OSKH) stake rises to 10.07% (from 9.97%),  while the Employees Providend Fund’s increases to 41.93% (from 41.49%).

However, by virtue of Section 87(1) of the Financial Services Act 2013, OSKH will require Bank Negara Malaysia’s (BNM) approval as its post-rights stake exceeds a multiple of 5%. OSKH  on Oct 21 submitted an application to BNM to seek its approval and the decision is pending.

If OSKH is unable to subscribe to its rights entitlement in full — in the event BNM’s approval is not obtained by Dec 8 (date of acceptance and payment for the rights issue) — those excess shares shall be underwritten accordingly (a second supplemental agreement has been signed).

Our TP of RM7.10 reflects the effects of the restructuring and implies 0.9 times financial year 2016 book value (BV), based on the Gordon Growth Model of a 10% return on equity, 11% cost of equity and 4% growth.

With the restructuring overhang removed, RHBCap’s share price performance should be better going forward. However, to see a stronger rerating beyond one times BV, we would need to see a pickup in business growth on a more sustainable basis. A key risk to our view would be a significant negative surprise on asset quality. — Alliance DBS Research, Nov 19