Malayan Banking (RM4.52) HOLD Target RM5.45; RM4.80 (ex-rights)

Rights issue price fixed
ANNOUNCEMENT

The Group announced Thursday that the issue price has been fixed at RM2.74 per share, representing a 34.4% discount from the theoretical exrights price of RM4.17 per share.

In the same announcement, it was also highlighted that letters of undertakings had been received from Permodalan Nasional Berhad (PNB) and certain unit trust funds managed by Amanah Saham Nasional Berhad and the Employees Provident Fund (EPF) for their respective entitlements of 55.7% and 13.7% respectively. In addition, as part of its undertaking, PNB has agreed to apply for excess allocation of 20% of the proposed rights issue.

A point worth noting though is that EPF’s undertaking comes with a condition, in that the traded market price of Maybank shares must not be below the issue price of RM2.74 on the date of subscription, which we think highly unlikely.

COMMENTS
The rights issue is virtually a done deal given the undertaking of about 89.4% take-up by its two largest shareholders. Therein lies our concern with the issue, more specifically the dilutive effects of it though slightly mitigated by net interest savings. While we acknowledge management’s intent of strengthening its capital base for its strategic transformation and organic growth purposes, we are a little less excited about the timing and size of the issue.

Add to that the overhanging concerns of potential impairments on its recent regional investments, there’s a scarcity of positive factors to be excited over in the intermediate term.

While we believe the Group has the latent potential to stamp its mark regionally over the longer term, near term clarity remains hazy. We are compelled to lower our expectations in the light of this exercise, ascribing a lower P/B of 1.3x to its prospective FY10 book value of RM4.20 per share (we are assuming no net addition to book value in FY09) and
arriving at a target price of RM5.45 per share. We must caution however that there are greater downside risks to the valuation than there are upsides. Ex-rights, the target price is adjusted to RM4.80 per share. Our HOLD call is maintained.