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Bimb Holdings FINANCIAL SERVICES BIMB HOLDINGS (BIMB MK EQUITY, BIMB.KL) 12 Dec 2019 Unlocking the value and enhancing net asset per share of Bank Islam Company report BUY Kelvin Ong, CFA (Maintained) [email protected] 03-2036 2294 Rationale for report: Company update Price RM4.28 Fair Value RM4.80 Investment Highlights 52-week High/Low RM4.75/RM3.46 Key Changes We maintain our BUY call on BIMB Holdings (BIMB) with a Fair value revised fair value to RM4.80/share (previously: EPS RM4.90/share) based on a lower SOP valuation after YE to Dec FY18 FY19F FY20F FY21F incorporating the enlarged shares of BIMB following its announcement of issuing new shares for placement. No Total income (RM mil) 2,825.5 3,146.5 3,314.6 3,502.1 changes to our earnings estimate. Core net profit (RM mil) 682.1 774.0 855.9 923.9 FD Core EPS (sen) 40.3 43.7 48.3 52.1 BIMB has finally announced the key proposals to undertake FD Core EPS growth (%) 6.1 8.4 10.6 7.9 the restructuring with Bank Islam eventually becoming the Consensus Net Profit (RM mil) - 765.2 819.9 892.4 DPS (sen) 15.5 16.1 17.8 19.2 listed entity and the bank holding company. This confirms BV/share (RM) 2.97 3.22 3.62 4.19 the long awaited news that has been rife in the market on PE (x) 10.6 9.8 8.9 8.2 the group’s restructuring plans. Div yield (%) 3.7 3.8 4.2 4.6 P/BV (x) 1.4 1.3 1.2 1.0 To facilitate the restructuring, BIMB will dispose of its ROE (%) 14.3 14.4 14.1 13.3 100.0% shareholdings in BIMB Securities Holdings (BIMB Stock and Financial Data Sec Holdings), 49.0% in BIMB Securities and its subsidiaries (BIMB Sec) and its 100.0% stake in Syarikat Al Ijarah Sdn Shares Outstanding (million) 1,764.0 Bhd (SASB) to Bank Islam for a total of RM115.1mil. We Market Cap (RM mil) 7,549.9 deem the total purchase consideration at 1.0x P/BV as fair. Book Value (RM/share) 2.97 It will be settled by Bank Islam utilizing internal funds. P/BV (x) 1.4 ROE (%) 14.3 Coinciding with the proposed sale of subsidiaries, BIMB also announced that it will be placing out new shares to Major Shareholders Lembaga Tabung Haji (53.8%) Employees Provident Fund (12.3%) raise up to RM800mil. The issue price for the shares has yet to be determined. It will be at a discount of not more than Free Float 22.0 10.0% to the VWAP of BIMB shares for the 5 market days Avg Daily Value (RM mil) 3.1 prior to the price fixing date. Assuming a 5.0% discount to Price performance 3mth 6mth 12mth the 5-day VWAP price of around RM4.30/share, the issue price works out to be RM4.09/share. This will enlarge the Absolute (%) 8.1 (6.8) 16.0 share capital of BIMB by 196mil new shares or 11.1% from Relative (%) 10.8 (1.5) 22.6 RM1.76bil to RM1.96bil, with a marginal increase to BIMB’s BV/share. 5.0 2,000 4.5 1,800 The proceeds raised from the placement of shares will be 4.0 1,600 utilized to redeem a sukuk held by Lembaga Tabung Haji 3.5 1,400 (LTH). The sukuk, issued at a discount on 12 Dec 2013, 3.0 1,200 carries a profit rate of 6.25% in which BIMB has to incur an 2.5 1,000 annual interest cost of RM52.8mil. The carrying value of the 2.0 800 sukuk based on the 31 Dec 2018 audited financials of BIMB 1.5 600 was RM844.2mil. With an estimated RM76.8mil accrual 1.0 400 profits on the sukuk for 18 months (1 Jan 2019–30 June 0.5 200 2020), and a RM14mil redemption premium to be paid less 0.0 0 Dec-14 Dec-15 Dec-16 Dec-17 Dec-18 a RM15mil scheduled coupon payment on 12 Dec 2019, the total redemption for the sukuk targeted on 30 June 2020 is BIMB MK FBMKLCI Index estimated to be RM922.2mil. This will be funded by the proceeds raised from the private placement of shares with the balance settled by BIMB’s internal funds which we believe will be coming from dividends streamed to the holding company from its key subsidiaries. BIMB Holdings 12 Dec 2019 EXHIBIT 1: IMPACT OF POTENTIAL PRIVATE PLACEMENT EXERCISE Number of new shares to be issued for private placement to raise RM800mil @ 5% discount of BIMB share price (mil) 196 Current number of shares of BIMB Holdings (mil) 1,764 Enlarged number of BIMB Holdings shares (mil) 1,960 Number of shares of Bank Islam (Mil) before consolidation 2,510 Number of shares of Bank Islam (Mil) after consolidation of every 1.28 shares of Bank Islam to 1 Bank Islam share 1,960 Ratio of share swap for 1 BIMB share to Bank Islam share (x) 1.0 Number of shares of Syarikat Takaful (mil) 825 Number of Syarikat Takaful shares 1 BIMB share will be entitled to (x) 0.25 FY20F Earnings of Bank Islam (RM mil) 656 FY20F Bank Islam shareholders funds (RM mil) 5,803 Average Bank Islam shareholders funds (RM mil) 5,667 Bank Islam's ROE (%) 11.6% FY20 Bank Islam BV or net asset per share (RM/share) after consolidation of shares 3.0 Value of 0.3 shares of Syarikat Takaful (RM/share)/current share price: RM5.82/share 1.8 Combined value of 1.0 share of Bank Islam and 0.3 shares of Syarikat Takaful (RM) 4.8 Source: Company, AmInvestment Bank Bhd BIMB has 426,715,078 outstanding warrants which were issued on 5 Dec 2013. These warrants, with a conversion ratio of 1:1 into BIMB shares, will only be expiring on 4 Dec 2023. The warrants are out of money due to the high exercise price of RM4.72 and are unlikely to be exercised prior to the targeted completion date of the restructuring on 3Q2020. Nevertheless, the holders will be paid based on the 5-day VWAP of the warrants. This sum is estimated to be RM110.9mil and will be settled using internally generated funds. The restructuring will see BIMB’s securities business parked under Bank Islam as highlighted in our note on 22 Jan 2019. Current shareholders of BIMB will be receive shares of Bank Islam and Syarikat Takaful Malaysia Keluarga (STMK) in specie. Eventually, all BIMB shareholders will become direct shareholders of Bank Islam and STMK. There will be a swap between the shares of BIMB and Bank Islam. Based on the enlarged share capital of BIMB after the share placement of 1.96bil shares and BIMB shares of 2.5bil, 1 BIMB share will entitled to 1.3 Bank Islam shares. However, the shares Bank Islam will be consolidated. This will see every 1.28 Bank Islam shares consolidated into 1 Bank Islam share, thus lowering the number of shares in Bank Islam by 550mil to 1.96bil shares from 2.5bil. For simplicity’s sake, 1 BIMB share will then be swapped with 1 Bank Islam share. The proposed group restructuring and consolidation of Bank Islam shares are expected to enhance our estimated FY20 BV/share for Bank Islam to RM2.96 from RM2.30. Also with BIMB holding a 59% stake in STMK, 1 BIMB share will be entitled to 0.25 STMK share. With the strong earnings of STMK, the new structure will now allow investors to ride on the potential upside in STMK’s shares as its direct shareholder. After the completion of the proposed distribution of Bank Islam and STMK shares in specie, BIMB will cease to be shareholders of Bank Islam and STMK. However, BIMB will issue 2 new shares to Bank Islam for it to become a wholly- owned subsidiary of the latter. Based on our estimates and current share price of STMK of RM5.82, the combined value of 1.0 Bank Islam share and 0.3 STMK share of circa RM4.80 still provides some upside from the present share price of BIMB at RM4.28/share. However, profit opportunity from acquiring STMK shares indirectly at a cheaper entry price to STMK compared to the current market price is much narrower now than the beginning of this year. This is in view of the appreciation in BIMB’s share price of RM4.28/share vs. a low of RM3.48/share on 2 Jan 2019. BIMB is now trading at 1.2x of FY20 BV. This implies that the market is still undervaluing Bank Islam at circa 1.1x BV despite an expected ROE of 11.6% for FY20. The proposed group restructuring is expected to unlock the value of Bank Islam. In the event of certain key shareholders not taking up the new shares through the private placement, there will be a dilution of their stakes in BIMB. Should this occur, we expect liquidity of BIMB shares to improve. AmInvestment Bank Bhd 2 BIMB Holdings 12 Dec 2019 The proposed private placement is targeted to be completed in 2Q2020 while the distribution of Bank Islam and STMK shares in specie is scheduled to be completed by 3Q2020. The proposals will require the approvals of Bank Negara, the Ministry of Finance, Securities Commission, Bursa Securities as well as the shareholders of BIMB, Bank Islam and warrant holders.
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