KUALA LUMPUR: Abu Dhabi’s state investment arm Aabar Investments is said to be finding a buyer for its 25% equity stake in RHB Capital Bhd (RHBCap) that it bought in June last year.
Citing sources familiar with the matter, Reuters reported yesterday that Aabar Investments is engaged in talks with Japan’s Sumitomo Mitsui Banking Corp (SMBC) to dispose of the shareholding in RHBCap.
To recap, Aabar Investments acquired the 25% stake from its sister company Abu Dhabi Commercial Bank (ADCB) for about RM5.9 billion, or RM10.80 per share.
The price valued the block of shares at 2.25 times price-to-book based on RHBCap’s net assets per share of RM4.79 as of March 2011.
However, RHBCap’s share price has declined since then. The banking stock tumbled to a low of RM6.53 in last October from the peak of RM9.98 in last June after both CIMB Group Holdings Bhd and Malayan Banking Bhd terminated merger talks with the group separately.
Based on yesterday’s closing price of RM7.28, Aabar Investments’ stake is worth about RM4.01 billion, nearly 33% below its investment cost of RM5.9 billion.
In terms of valuation, yesterday’s closing price valued RHBCap at 1.43 times book value and a price-earnings ratio (PER) of 10.29 times, against the group’s net assets per share of RM5.09 as of September 2011.
“It is the second cheapest bank in terms of PER and price-to-book valuation, which we believe is unreasonable given that the bank has consistently churned out mid-teen ROE (return on equity),” explained Cheah King Yoong, an analyst with Alliance Research.
Talk that SMBC, which has been issued a commercial banking licence by Bank Negara, is interested to take up an equity stake in RHBCap is not totally new in the industry.
Back in 2007, there was already market talk that the Japanese financial group was eyeing RHBCap to expand its local presence.
“It doesn’t make sense (for Aabar Investments) to sell now as the market price is substantially lower than the price it paid a year ago,” said an analyst.
At face value, Aabar Investments’ loss will be roughly a third of its RM5.9 billion investment, or about RM2 billion based on the three-month volume weighted average price of RM7.16.
In fact, the loss incurred could be even bigger, after taking into account financing costs as Aabar Investments is believed to have taken a loan to finance the share purchase, said analysts.
However, the government of Abu Dhabi, which is the ultimate owner of both Aabar Investments and ADCB, may be willing to hive off the stake held by Aabar Investments at a price below RM10.80 per share.
The share purchase was indeed a left hand to right hand transaction.
Many have viewed Aabar Investments’ share purchase — undertaken when both Maybank and CIMB were keen to merge with RHBCap — as setting a benchmark price-tag for the eventual sale to Maybank or CIMB. However the sale did not take place.
From the Abu Dhabi government’s perspective, the investment costs of RHBCap would just be the price of RM7.20 that ADCB paid in 2008.
Furthermore, the Abu Dhabi government owns a 95.23% equity stake in Aabar Investments, compared with its 64.8% shareholding in ADCB.
Hence, it would be easier for the government to push through the share sale. There are less minorities in Aabar compared with ADCB to account to.
While Aabar Investments may be willing to settle for a price lower than RM10.80, it should be noted that RHBCap’s current share price is near its cost of RM7.20.
In terms of timing, some quarters may wonder why SMBC would want to buy a stake in RHBCap now when the latter is still ironing out the terms for its merger with OSK Holdings Bhd’s investment banking division.
New shares might be issued for the merger exercise that could dilute Aabar Investments’ 25% stake. It is already known that the merger could be a share swap deal, although the pricing and terms are still being discussed.
“A buyer would have to have in-depth knowledge of the RHB-OSK merger to take up the 25% stake, otherwise there is too much uncertainty,” noted one analyst.
Prospective suitors for the 25% stake will be drawn to RHBCap’s relatively cheap valuations and strategic positioning in Malaysia.
However, they will also have to be cautious of the uncertainty following the RHB-OSK merger which could see shareholding dilution.
“OSK Holdings’ team, under Ong Leong Huat, is widely tipped to run RHBCap’s merged investment banking business. However, RHBCap’s existing management, under Kellee Kam, has already been running the group well and rejuvenating it over the last few years ... so where does that leave SMBC? Will it be just a passive shareholder?,” an analyst posed the question.
Still, Alliance’s Cheah sees RHBCap as an attractive merger and acquisition play, more so since he thinks the top three banks, Maybank, CIMB and Public Bank, are unlikely to be up for sale.
“Besides the potential synergistic benefits that could arise from this upcoming merger deal between RHBCap and OSK Holdings, the merger exercise will leapfrog its scale and increase its appeal to potential suitor significantly,” said Cheah.
Cheah highlighted that following the merger, RHB-OSK will be the largest securities firm in Malaysia and the fourth largest bank.
