Tuesday, May 29, 2012

RHBCap & OSK- trading at attractive prices

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).
The deal valued OSK IB at 1.77 times price-to-book and 18.9 times historical price-to-earnings (as per the report in the Star) and RHBCap at 1.34 times price-to-book and 9.1 times historical price-to-earnings (based on the financial statement for QE31/3/2012 where the 1Q2012 EPS was 19.8 sen & Net Assets ps was RM5.46).

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.


newbie said...

Dear Alex,
OSK will be receiving RM147.5 million in cash and 245 million of new RHB shares.In view of it subsequently being an affected PN17 company,do you still consider it to be worth the while to be holding OSK?Wouldn't it be better to invest directly in RHB?
Thanks a lot for bringing up this topic.

Mat Cendana said...

I think the deal is fair too. But I believe the heavy selling was because speculators had thought OSK would make out a capital repayment since it no longer have the investment bank. However, OSK has mentioned that it will remain as a listed company and would be using the shares and cash as capital for a new business, whatever it may be.

Although a capital repayment has been ruled out, might there be the possibility that OSK might use some of the cash to give some sort of a special dividend? After all, the main shareholders might also want to reward themselves for bringing about this deal.

I've bought a few lots at 1.53 yesterday because I feel the price has been pushed down a bit too far. The only worry is the possibility of being a PN17 company. However, I feel the price will go up once investors get over the disappointment and realise that OSK is now the owner of 10% of a company with potential in RHB Capital, plus cash.

Alex Lu said...

Hi newbie,

RHBCap is a cheap banking stock. On that basis, it is a good buy. OSK will turn into a property stock, with a sizable stake in RHBCap. As a property stock, it would attract a lower PE multiple, which may cause the share price to drop a bit.

However, I believe OSK will distribute the RHBCap stake (245 million shares) to its shareholders. Based on current outstanding shares of 965 million, it would work out to be 1 RHBCap share for every 4 OSK shares owned. If you work on that basis, OSK would be a cheap entry into RHBCap.

Anonymous said...

I disagreed with you.

I think what Ong wants is to control the 10% RHB shares received through OSK. With this 10% shares he will be the 3rd largest shareholder of RHB indirectly and he will have influence in RHB board (probably get appointed as a director). If there is a capital repayment to distribute the RHB shares received, he will only has control of 3.2% of RHB shares (he has 32.19% direct & indirect shares in OSK). Hence it is unlikely for him to declare capital repayment to distribute RHB shares. There is no mention of capital repayment in the announcement. In Star newspaper 29/5/12 news, it said that OSK was not considering a capital repayment to its shareholders for now.

With 10% shareholding, RHB is not even an associated company of OSK (>20% is associate company, >50% is subsidiary company) & OSK cannot consolidate the earnings of RHB into its earnings! It can only be classified under Other Investments in the balance sheet, only dividends from RHB can be classified as earnings!

Hence after merger, OSK will be heavy in assets but very light in earnings. I doubt the remaining business and future new business will be enough to compensate for the earnings loss from the old business disposed! The EPS will be very low & hence PER very high and the value of the heavy assets can only be unlocked if there is a capital repayment.

The deal is unfaif from OSK small shareholders point of view!

Mat Cendana said...

And it's now even cheaper at 1.35 on Friday's close. I'm buying more at this price to average down the price. The drop is due more to the general market sentiments, especially about Europe and China, than on OSK itself.

Something interesting: I've read somewhere that OSK will have to obtain a 75% approval from its shareholders at an EGM to sell the investment bank to RHB Capital. Now, the major shareholders control only 52%, which means the minority shareholders will have significant power in the whole thing.

I believe OSK will have to throw in a sweetener to make sure the shareholders are motivated enough to vote for it (must also consider many people's tendency to do nothing i.e. in not returning the proxy vote). Distributing the RHB Capital shares as you have mentioned would be great. But that means OSK will be left with only around 3% from 10% in RHB Capital. So, will the main shareholder do it?

At the very least, a special dividend must be given if there is no share distribution. If not, what's in it for the minority shareholders? Having a 10% stake through OSK Holdings is just not good enough an attraction to approve the deal.

Alex Lu said...

Hi jp888

Your points are logical & valid. The comment regarding OSK being asset-heavy but earning-lite is quite accurate and could certainly explain why the stock came under selling pressure of late.

Alex Lu said...

Hi Mat Cendana

I like your point about OSK's management needing to sweeten the deal to get the approval from the shareholders. One way of doing so would be to give a special dividend, which could come from the cash portion of the selling consideration.

The cash from the sale is about RM186.8 million or approximately 19.3 sen per OSK share. The management may round it up to 20 sen per share.

Anonymous said...

OSK remind me of what happened to BjToto many years ago.

It was around 2002, foreign funds was dumping BjToto shares & the price drop sharply after they discovered that there was a substantial sum of intercompany loan provided by BjToto to BjLand, the major shareholder of BjToto, which was under heavy debt. They thought that it was unfair since BjLand only had around 50% of BjToto shares, making full use of BjToto cash was unfair to minority shareholders. BjToto management was under pressure & they came out with a scheme to pay out bonus ICULS to all shareholders so that BjLand can sell this ICULS & repay the intercompany loan. It was fair since all shareholders received they fair shares of ICULS entitlement according to their shareholdings.

I remember this since I bought BjToto shares at low prices then, thinking that even if the intercompany loan was not repayed, being a cash cow with strong cash flow, BjToto would continue to pay good dividends. My bet was right, when the dust settled, BjToto shares start rising & it gave out a lot of capital repayments & special dividends to help BjLand repay its debt in the following few years. Now BjToto is the top performing stock in my portfolio!

I brought this up since there are similiarity between these 2 cases, both involved violation of minority shareholder rights & foreign funds selling. However, the reactions were different in that BjToto management actually admitted they were wrong by implementing a solution, whereas OSK management kept on defending its proposal & saying it has done nothing wrong.

In StarBiz 16/6/12 news, title ‘OSK may look at new core business’ (http://biz.thestar.com.my/news/story.asp?file=/2012/6/16/business/11492021&sec=business), Ong said “There's nothing wrong with the company; why should we pay out everything?” Why not? The fairest way is to distribute all sale proceeds to all shareholders according to their shareholdings, not letting the management taking full advantage of it.

Ong also said “The transaction, estimated to take another three months for completion,… On whether there would be a special dividend, Ong says that can be decided only after the deal is completed, possibly in another three months.” I think he is merely buying time. If OSK wanted to acquired new business, it need a lot of cash, it will probably use up all the cash from RHBCAP, how is it going to pay out the special dividend?

The OSK case is different from BjToto case in that it will have little earnings after the merger, even though it has a lot of assets, it is locked away from minority shareholders unless there is a capital repayment.

I hope there are more than 25% minority shareholders to vote against in the EGM!

Anonymous said...

Actually and given that they will remain in the management of RHB, OSK is likely to equity account its 10% in the enlarged RHB Cap unit which may even translate to greater earnings compared to its past years. As such, it is unlikely to slip into PN17 and hence, the distribution of RHB shares to shareholders is unlikely.

In addition, OSK is likely to continue giving dividends through dividends from RHB as RHB pays out 35% of its earnings.

I believe OSK shares have been oversold of late. At current price and trading at 0.57x price-to-book, the price appears cheap as RHB Cap trades at 1.4x price-to-book. A technical rebound perhaps?

Mat Cendana said...

@emowe3 - Looks like the rebound is happening although the upward movement is also influenced by Greece's election results.

Investors may have to hold on for a while yet - in the interview with The Star last Saturday, Ong was rather coy about his exact plans for OSK; wanting for the deal to be completed first before saying anything. But he must remember that he must get enough votes at the EGM for the sale.

To motivate the shareholders, he will have to announce *something* before that which they will immediately benefit from, not just long term plans. Many people don't have this kind of patience. What's in it for us?

Mat Cendana said...

OSK Holdings is seeing heavy volume and a sudden spike in price. I've done a search at the news site but can't find the source that's driving this seeming excitement. Do you know what's happening, Alex?

By the way, there's wisdom in averaging down the price of a counter after it had fallen a certain percentage of one's previous buy. Now the buys at 1.30-something have brought in some profits.

Alex Lu said...

Hi Mat Cendana

I am not sure why the stock shot up. It was reported in the Star that the company need not find a new business after the disposal of the investment banking & related businesses.

You are right about the averaging down in this case. Sometimes you have to go with the "gut feeling".

Mat Cendana said...

This was announced by OSK at the BSKL website yesterday - the EGM concerning the sale of OSK's investment bank business to RHB Capital will be on 24 August http://bit.ly/RCnGaW

Nothing else is mentioned - only about those assets. There's no incentive for minority shareholders to approve the sale, so why should they? MBf is giving a 30 sen special dividend from the sale of its card business to AMMB. BUT NOT OSK.

I believe it needs 75% votes, and the major shareholders control only 50% or so. If we don't vote for it, or don't attend, will we be automatically considered as consenting to the sale?

And is it possible that OSK might announce a special dividend or whatever between now and the EGM? Or is that notice at BSKL final, meaning only the agenda mentioned will be discussed?

Alex Lu said...

Hi Mat Cendana,

If OSK management wants to retain the cash portion (of RM186.8 million), it should make a convincing case for it. If they do not have a good case, they should pay back some of the cash as a reward. however, the cash portion is not huge- only equivalent to RM0.19 per share.

If the management feels that it needs to give out a special dividend to get the vote, they can announce it & get approval at a later meeting. An announcement is as good as the approval.

As I see it, the future of this group lies in the property development. Check its website (http://www.oskproperty.com.my/). It is going into the high end segment with the fat margin. Meanwhile, it will sit on its stake in RHBCap & wait for the price to go up. One day, Maybank or CIMB may revisit their earlier buyout proposal & another offer may come around.