Rights Start Trading Today
The Rights to Maybank’s Rights Issue shares commence trading today. In this report, we will attempt to derive a fair value for the Rights based on our valuation of Maybank and evaluate whether existing shareholders should renounce or exercise their Rights. Note that the volatility in Maybank’s share price over the next one week will also determine the trading range of the Rights. The share price is currently trading at 1.13x FY09 estimated PBV vs its 10-year historical average of 1.8x PBV. Despite its relatively depressed valuations, we are maintaining our NEUTRAL call but with a slightly higher TP of RM4.00 (1.10x forward PBV). The likelihood of higher loan loss provision from its international operations and uncertainty over the quantum of impairment on its RM6.2bn in goodwill is likely to cap further share price’s outperformance.
Arriving at a fair value for Rights. Based on Maybank’s closing price and pegging a fair 5% to 15% discount on Maybank’s prevailing market value, implying a 0.94x-1.05x Price to Book Value (PBV), we estimate that the Rights to the Rights Issue could trade between RM0.78 to RM1.19 (ie: RM3.52- to-RM3.93 post subscription of Rights Issue), with a potential fair value closer towards the RM1.00 to RM1.19 level, pricing Maybank at 0.98x – 1.05x PBV. This represents a fair 10% and 12% upside to our TP of RM4.10 and current share price of RM4.16, upon subscription and conversion of the Rights.
Attractive pricing of exercise price limits downside. Given that the subscription price of the Rights of RM2.74 is at a relatively attractive 0.74x FY09 PBV, we believe that the Rights are unlikely to trade at a steep discount to Maybank’s prevailing market price, which values Maybank at 1.10x FY09 PBV vs its 10-year historical mean of 1.80x. Assuming if the Rights were to trade at the upper end of our hypothetical trading range of RM1.19, this would still price Maybank at a relatively attractive 1.05x PBV and 1.10x PBV upon imputing a hypothetical RM1.55bn in impairment on goodwill vs its historical mean of 1.80x.
It pays to subscribe for investors with higher holding cost. Investors with relatively high holding cost would be better off subscribing for the Rights, given the:
1) relatively low subscription price vs their existing holding cost and hence stronger averaging effect, and
2) the current depressed valuations provide longer term upside potential.
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