Friday 24 January 2014

CIMB’s private placement exercise draws mixed reactions from analysts

CIMB’s private placement exercise draws mixed reactions from analysts

by Sharon Kong, sharonkong@theborneopost.com.
Posted on January 16, 2014, Thursday

KUCHING: CIMB Group Holdings Bhd’s (CIMB) recent private placement exercise has garnered mixed reactions from various analysts, with adverse market movements the cause of this latest development.

According to RHB Research Institute Sdn Bhd (RHB Research), the capital-raising could possibly have been prompted by adverse market movements. This is due to CIMB having said in its statement to Bursa Malaysia that the sharp depreciation of the Indonesian Rupiah had set back to its capital accumulation plan.
The research house further pointed out that the adverse direction that bond yields have seen in 2013 may have also prompted the fund-raising exercise.

“Based on its first nine months of 2013 (9M13) results, adverse forex and interest rate movements have shaved off RM1.5 billion in shareholders’ equity – exchange fluctuation reserve of RM693 millon and available for sale (AFS) revaluation reserve of RM817 million.

“By our estimates, this translates to RM1.1 billion in CET-1 capital, after taking into account the required regulatory adjustment of a 55 per cent haircut for AFS reserves,” RHB Research said.

With the issue of capital addressed, two things that RHB Research thinks investors will now seek further guidance on from management are the sustainable return on equity (ROE) level going forward, and whether the dividend reinvestment schem (DRS) will continue.

Looking ahead, for 2014, it thinks a 15 per cent ROE target may be possible. This will also be similar to Malayan Bank Bhd’s (Maybank) 2013 ROE target, post the RM3.66 billion capital raising exercise it did in 2012.

Also, now that CIMB has shored up its capital, it remains to be seen whether management will opt to keep in place the DRS, the research house added.

“The latter appears to be well received, achieving a take-up rate of 80.2 per cent for the recent second quarter of 2013 (2Q13) interim dividend.

“The flipside is that the DRS is slightly dilutive, with an estimated one per cent impact on financial year 2014 forecast (FY14F) earnings per share (EPS) and 40 basis points (bps) to FY14F ROE,” it noted.

According to analyst Cheah King Yoong of Alliance Research Sdn Bhd (Alliance Research), the capital raising exercise engaged by CIMB came as a surprise to them.

He similarly opined that they are not certain whether the group will continue with its dividend reinvestment plan (DRP) upon the completion of this private placement exercise.

“Should the research house assume that the group will be utilising the net proceeds raised to retire part of its borrowing and continuing with its DRP, its FY14-FY15 earnings per share (EPS) forecasts will be diluted by three to four per cent,” he noted.

In terms of earnings forecast for CIMB, Cheah highlighted that pending further clarifications by the management with regards to the utilisation of its net proceeds, and the continuity of its DRP, they made no changes to their earnings estimates for now.

“We will revise our earnings estimates for the group post our meeting with the management next week,” he added.


Read more: http://www.theborneopost.com/2014/01/16/cimbs-private-placement-exercise-draws-mixed-reactions-from-analysts/#ixzz2rEaYfgwL


Main points:  

1.  Adverse forex and interest rate movements have shaved off RM1.5 billion in shareholders' equity.
2.  This translates t RM1.1 billion in CET-1 capital.
3.  The capital raising exercise by CIMB came as a surprise.
4.  What will be the sustainable ROE going forward?
5.  Will the DRS (dividend reinvestment scheme) be kept in place?
6.   DRS is slightly dilutive, with an estimated 1% impact on financial year 2014 forecast (FY14F) EPS and 40 basis points (bps) to FY14F ROE.


Scenario analysis:

Assuming:
1.  No changes to the earnings estimates.
2.  CIMB utilising the net proceeds raised to retire part of its borrowing and continuing with its DRP.

It is forecasted that these will impact on CIMB's FY14-FY15 EPS, diluting it by 3 to 4%.

(Share price of CIMB closed at 6.80 per share on 23.1.2014.)

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