Tuesday, September 8, 2009

HwangDBS raises RHBCap to buy on strong ROE profile

HWANGDBS Vickers Research yesterday upgraded RHB CAPITAL BHD [] (RHBCap) to a buy at RM4.90 with a higher target price, noting the latter’s “relatively strong” return on equity (ROE) profile.

“We see RHBCap as a laggard Malaysian bank. Also, judging from its ROE profile, RHBCap deserves to trade at higher multiples than current levels. We expect 12% to 13% ROE over FY2009-2011, higher than its historical average (2000-2008) of 9%,” it said in a note.

Its RM5.70 target price for RHBCap implies 1.3 times FY2010 book value, which is equivalent to mid-cycle valuations. The research house also raised earnings for RHBCap by 2% to 5% for FY09-11 after refining its non-interest income assumptions.

“We believe RHBCap’s ‘low-hanging fruit’ would be to lower its provision charge-off rate as the macro environment improves. The manifestation of RHBCap’s key strategies could also be a way it could achieve its targeted ROEs,” it said.

HwangDBS Vickers noted that the Employees Provident Fund Board in May 2008 sold a 25% stake in RHBCap to Abu Dhabi Commercial Bank (ADCB) at RM7.20 or two times book. This price is now equivalent to 1.6 times FY2010F book value or one standard deviation (+1 SD) above its 10-year historical mean.

“Given its relatively strong ROE profile, we believe RHBCap deserves to trade above its historical mean valuations. In addition, RHB Cap has undergone a corporate restructuring, which we believe is now beginning to bear fruit,” HwangDBS Vickers said.



RHB Cap traded at high of 1.7 times book value in 2008.

The research house also noted that RHB Cap’s overall target milestones remained intact.

“RHBCap aims to be top three in Malaysia in selected segments. While its broad milestones are unchanged, its business focus may be reviewed. Its focus on investment banking is part of the plan along with the recovery in capital market activities. We have seen RHBCap make headways back into the investment banking business but it still lags behind its top two peers (CIMB and AMMB),” HwangDBS Vickers said.

It noted that RHB Cap had regained some traction in the investment banking business, having emerged as the top three in league tables for loan arrangers, book runners, Islamic bonds and equity offerings. “Although small, the build-up is expected to be sustainable for the rest of this year.

Notably, RHB lost market share in 2006 but has now regained some grounds.”

The research house also said loan approvals at RHBCap seemed to have picked up, a good sign for future loans growth. “Up to 2Q09, RHB Cap’s loan growth stood at 2%. We are projecting 6% loan growth for FY09,” it said.

RHBCap closed at RM5 yesterday, up one sen.

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