IT is mind-boggling to predict the outcome of the late Tan Sri Teh Hong Piow’s 23.4% stake in Public Bank Bhd which is currently valued at RM19.5 bil as nobody is privy to the arrangement of his shares or the future plans of the individuals inheriting his shares.
Against such backdrop, UOB Kay Hian Research has hypothesised four potential scenarios in an attempt to draw a conclusion as to how it may impact the strategic direction and consequently share price performance of Malaysia’s third largest banking group – subject to Bank Negara Malaysia’s (BNM) approval of course:
- Scenario 1: Stake is injected in family trust and broken up among his children in stakes of <10% (comply with Section 92 to Financial Service Act) who then decides to retain their respective stakes for the foreseeable future;
- Scenario 2: Children decide to dispose the stakes to institutional investors leading to a full institutionalisation of the bank run by professional managers;
- Scenario 3: Strategic stake sold to a foreign banking group;
- Scenario 4: Stake is disposed to another domestic banking group who will then launch an offer to acquire and merge the entire Public Bank group
Commenting on the scenarios, UOB Kay Hian noted that it would be “largely business as usual in Scenario 1-2”.
“The group’s strategic direction would be least impacted in Scenario 1-2 as it would largely be business as usual with the new shareholders likely to remain dependent on the current crop of high-calibre professional managers to drive the strategic direction of the group,” opined analyst Keith Wee Teck Keon in a company update.
“That said, Scenario 2 may lead to a short-term share price overhang as any disposal is unlikely to be executed at a premium given Public Bank’s existing premium valuations.”
However, UOB Kay Hian Research expects Scenario 3 to result “in a slight tweak in business focus”.
“Under such a scenario, the new strategic foreign banking shareholder would, in our view, strive to maintain the overall unique culture and focus that has allowed the group to thrive but potentially enhance the competitiveness of the bank via further digitalisation,” reckoned the research house.
As for Scenario 4, UOB Kay Hian Research said it would provide “the least value proposition”.
“Among our four potential scenarios, we opine that Scenario 4 provides the least value-added upside. This is because Public Bank’s culture is unique while its key operating metrics are already ranked highly among its domestic peers,” suggested the research house.
“A potential merger with another domestic bank could be seen as dilutive to the group’s operating metrics and hence ROE (return on equity).”
Additionally, the potential acquirer who after having paid a valuation premium for Public Bank (potential goodwill of RM32 bil at current market price) may also have to contend with the risk of talent attrition given the vastly different culture within Public Bank as opposed to its domestic peers.
Above all else, UOB Kay Hian Research is of the view that an acquisition of stake by strategic investors who are wealthy individuals is also “a less likely scenario”.
“We opine that a stake sale to a consortium of high net worth individuals may not be a feasible option given Section 92 of the Financial Service Act (FSA) caps individual shareholding at 10% which does not provide the individual investor/s strategic control,” the research house pointed out.
“Moreover, the scale of Public Bank’s market capitalisation with a 10% stake equivalent to RM8.3 bil would require significant financial outlay for individual investors, and given Public Bank’s ample liquidity, any individual investors would be able to accumulate a minority stake from the open market anyhow.”
Whatever the case is, UOB Kay Hian Research has reiterated its “buy” rating on Public Bank with a higher target price of RM5.10 (from RM5 previously) even as Public Bank’s share price has experienced a slight overhang as ownership of its late founder’s stake remains in flux.
“We see this as an opportunity to accumulate on weakness as the bank’s strategic focus remains intact, led by a strong management team,” projected the research house. “The group has the largest headroom for potential provision write-backs when macroeconomic conditions permit.”
At 10.36am, Public Bank was unchanged at RM4.31 with 6.11 million shares traded, thus valuing the bank at RM83.66 bil. – Jan 13, 2023
