HwangIB acquisition to result in merger synergies for Affin

KUCHING: Affin Holdings Bhd’s (Affin) acquisition of Hwang Investment Bank Bhd (HwangIB) is, according to analysts, expected to result in merger synergies and integration costs.

According to RHB Research Institute Sdn Bhd (RHB Research), while it lauds Affin’s recent acquisition of Hwang IB as a transformational deal for the group, investors will need to be patient to reap the benefits.

Affin expects acquisition synergies to stem from four main sources including cross-selling to Hwang IB’s customers, cross-selling to Affin’s customers, cost synergies and transformative synergies, although these are only expected to realise in the longer term.

The research house further noted that over the next three years (2015 to 2017), Affin expects to reap a total of RM84 million in synergies.

“These comprise revenue synergies of RM32 million from cross- selling opportunities, cost synergies of RM79 million relating to productivity gains, scale benefits and branch consolidation and expected dissynergies of RM25 million, mainly from the institutional equities business,” it explained.

Beyond that, the research house highlighted management expects a steady net synergies level of RM43 million per year.

“In terms of integration costs, Affin guided for RM54 million to be incurred over the next 12 to 18 months. These include costs for IT, system platform and rebranding.,” it added.

Pending further details on the rights issue ( eg pricing, number of rights shares), RHB Research left its earnings forecasts unchanged while keeping its fair value of RM4.30 per share based on 10-fold current year 2014 (CY14) earnings per share (EPS) and ‘neutral’ call on the stock.

As for the research arm of Hong Leong Investment Bank Bhd ( HLIB Research), it is neutral on the merger and acquisition (M&A).

“On the positive side, we do acknowledge that the acquisition is complementary with potential synergies.

“However, we believe this will be negated by dilution to EPS, return on equity (ROE) and capital ratios, arising from the planned RM1.25 billion rights issue which is scheduled to complete in the second quarter (2Q), in the interim before full synergies filter through,” it opined.

Moreover, given that its share price has depreciated by 8.3 per cent since the announcement of acquisition details, the research arm’s initial EPS dilution estimate of 18 per cent could be larger.

Having left its forecasts on the group unchanged, HLIB Research maintained its ‘hold’ recommendation on the stock and target price at RM4.26 based on Gordon Growth with ROE at 10 per cent and weighted average cost of capital (WACC) at 10.8 per cent.