Kenanga unlikely to pay a premium for Interpac’s stockbroking business

FOLLOWING the change in government, business deals seem to have come to a halt, as the corporate world comes to terms with the positive changes taking place. But that has not stopped Kenanga Investment Bank Bhd from proposing to acquire stock broker Inter-Pacific Securities Sdn Bhd (Interpac).

In fact, Kenanga’s filing to the stock exchange early this week in which it said it had initiated discussions to acquire Interpac is the first large corporate market deal to be announced under the new Pakatan Harapan government that recently came into power.

According to industry sources, the deal was already in the works prior to the general election, and shareholders of the two brokerages decided to go ahead with formal discussions early this week following the central bank’s nod.

That, in a way, is a reflection of confidence in the new government in shaping the econ- omy and financial sector going forward, reckons an industry player.

Kenanga has not given any indication of the price it is planning to pay for Interpac – the stockbroking arm of Berjaya Corp Bhd (BCorp).

Some think that it is unlikely that Kenanga will fork out a premium for its smaller rival’s broking business to expand its remisier base.

“Going by industry benchmark, Kenanga should be looking to pay around one to 1.1 times book value for Interpac. That should work out to less than RM120mil,” says a banker.

In the proposed merger of RHB Bank Bhd and AmBank Group last year, the deal came to one time price-to-book (P/B) value for both banks.

The last major merger and acquisition (M&A) in the stockbroking industry was about four years ago when Affin Holdings Bhd acquired Hwang-DBS Investment Bhd at 1.3 times P/B.

Before that, BCorp had planned to sell Interpac Singapore to Kim Eng Holdings Ltd,

At the price tag of RM142mil, Inter-Pac was valued at 1.42 times book based on the net value of Interpac’s stockbroking asset at RM100mil.

Analysts had considered it a rather good price, but the deal fell through.

But M&A multiples in the financial industry in recent years have been trending down.

Emergence of Vincent Tan

An interesting development in the proposed Kenanga-Interpac deal is the possible emergence of Tan Sri Vincent Tan. His BCorp wholly owns Berjaya Capital Bhd, which owns 91.5% of Inter-Pacific Capital Sdn Bhd that, in turn, owns all of Interpac.

Given that the proposed deal will be financed by shares of Kenanga and cash, Tan through BCorp could emerge as one of the larger shareholders in the merged entity.

Hence, the merger would lead to a change in the shareholding structure of Kenanga, which now counts Sarawak-based CMS Capital Sdn Bhd as its single largest shareholder.

CMS Capital is the private company linked to the current Sarawak Yang di-Pertua Negeri Tun Abdul Taib Mahmud.

CMS has a direct 21.22% interest in Kenanga, while Taib’s family-listed vehicle, Cahya Mata Sarawak Bhd (CMS), holds a further 4.16% directly.

Taib’s family collectively owns a 33.35% stake in CMS.

CMS, which is seen as being aligned to the previous Barisan Nasional government, has seen its shares come under selling pressure since the change in government.

With Berjaya’s entry, it would dilute that factor. Kenanga’s second-largest major shareholder is Tan Sri Tengku Noor Zakiah, who owns 14.16%. She is the founder of the company (then known as K&N Kenanga) in 1973.

The other substantial shareholder is Tokai Tokyo Financial Holdings with 5.05%.

Operations-wise, there are synergies to be reaped.

Kenanga can’t fight the big boys such as Malayan Banking Bhd and the CIMB group, which are bank-backed, but it has a niche in the retail trade,

Inter-Pac has a fairly decent pool of 230 remisiers and dealers – larger than other smaller brokers like SJ Securities Sdn Bhd or PM Securities Sdn Bhd.

The stockbroking company has a paid-up capital of RM250mil and operates five branches across Kuala Lumpur, Penang and Johor Baru. Kenanga is currently the largest retail stockbroker in the country with a remisier base of about 1,000 via 32 branches throughout the country.

The merger would create one of the largest stockbrokers in the country and further strengthen Kenanga’s leading position in the retail stockbroking sector.

Data from Bursa Malaysia shows that Kenanga is ranked second by trading volume and fourth by trading value year-to-date.

Affin Hwang Capital is currently leading in terns of trading volume, owing to having the largest number of proprietary day traders of any brokerage in the country.

With the acquisition, Kenanga will become the top-two largest stock brokers by trading value in Malaysia, with a combined market share of over 10% and retail market share of about 25%. “Kenanga would be the biggest retail broker in the country,” says an analyst.

According to BCorp’s annual reports, InterPac’s revenue is on average around RM30mil to RM40mil a year, mostly from overheads and back-end operations.

Assuming a margin of 10% to 20%, this would translate into profits of some RM3mil to RM6mil yearly.

Through a merger, these costs can be synergied. Assuming an 80% savings, it could translate to between RM25mil and RM30mil in profitability that would be reflected immediately in the books of Kenanga’s bottom line.

For the financial year ended Dec 31, 2017, Kenanga made a profit after tax of RM 24.17mil, a rise of 20% from a year ago.

Its cash balances stood at RM1.35bil with total assets worth RM6.49bil, while total liabilities stood at RM5.6bil.

Shares in Kenanga closed at 60 sen yesterday, up 10% since the start of the year.

Both parties have six months from May 16 to complete the deal.