RHB Cap yesterday signed the conditional share purchase agreement with OSK Holdings to acquire:
- 100% of OSK Investment Bank Bhd (OSK IB) for 245 million new RHB Cap shares worth RM7.36 each, and RM147.5million in cash;
- 100% stake in OSK Investment Bank (Labuan) Ltd, 20% in OSK Trustees Bhd and 20% in Malaysian Trustees Bhd held by OSK Holdings for RM26.8million in cash; and
- 59.95% in Finexasia.com Sdn Bhd for RM12.5million (in cash).
I think the deal is a fair deal. The deal is slightly more favorable to OSK as it will be swapping its IB valued at 1.77 times its book value for RHBCap shares valued at only 1.34 times its book value. The market is expecting OSK to ask for a price closer to 2.0 times its book value. The disappointment led to a selldown in OSK shares this morning, which dropped 14 sen to close at RM1.60. If OSK’s management were to insist on an asking price for OSK IB of 2.0 times its book value, then RHBCap’s management would surely demand a higher value for the RHBCap shares to be issued in the share exchnage. To me, you can’t have the cake and eat it at the same time.
As for RHBCap, the deal will result in earning dilution. Earning dilution happens when you have a share swap where you are issuing your shares at a lower PE than the shares that you are buying. This earning dilution will take 18 months to work out and it may explain the current weakness in the share price of RHBCap. Nevertheless, RHBCap is an attractive banking stock, trading at a lower PE & PB than the other banking stocks listed on Bursa Malaysia.
Table: RHBCap's valuation vis-a-vis other banking group
RHBCap is trading very near its medium-term uptrend line support of RM7.20. The next support is the psychological RM7.00 level.
Chart 1: RHBCap's daily chart as at May 29, 2012_11.30am (Source: Quickcharts)
OSK has been trading within a 'range' between RM1.60 & RM1.80. We can expect good support at RM1.60 & its next support would be the horizontal line at RM1.50.
Chart 2: OSK's daily chart as at May 29, 2012_11.30am (Source: Quickcharts)
Based on the above, I believe that OSK and RHBCap are fairly attractive at the current prices. Both are good stocks for long-term investment.