Kiatnakin Bank
Finally
Kiatnakin Bank Plc (KK)
What’s new? KK announced that it completed the merger of PHATRA and KK on September 13. PHATRA shareholders holding 99.93% of the stock swapped their shares for KK shares at a ratio of 1.00 share of PHATRA Capital for 0.9135 of a KK.
Synergy-building ahead: The deal would appear to mean more upside for PHATRA than for KK—KK’s much bigger capital base should enable PHATRA to take larger slices of big-ticket underwriting deals (PHATRA’s pre-merger paid-up capital was Bt1bn; KK’s was Bt10bn). Also, being part of a bank should make its funding costs cheaper. For its part, KK takes delivery of what is arguably Thailand’s best investment bank, which also has a substantial wealth management operation. The merged entity should be able to achieve greater earnings growth than the two financial firms could have done in isolation.
23% dilution effect should be offset by higher FY13 earnings: KK issued 192m new shares for the share swap, which implies 23% EPS dilution. Hence, PHATRA’s 4Q12 profit will go to KK’s bottom-line. We conservatively forecast that KK’s earnings will rise by 5% in FY12 to Bt3bn and by 22% in FY13 to Bt3.7bn. But there should be substantial scope for upside from post-merger business expansion and lower funding costs for the investment banking operation.
Action: Although KK’s share price has gone up 25% since the merger was announced on March 30, we think it has further to rise. There is fee and underwriting income to be earned from upcoming big-ticket deals, such as PTTEP’s capital-raising, Star refinery’s IPO, and Betagro’s IPO. Our TRADING BUY stands with a YE13 target price of Bt54, pegged to a justified PBV at 1.36x (ROAE of 11.4%, growth rate of 5% and Ke of 10%), which is close to the mean Bank sector YE13 PBV of 1.4x.
Note that management will announce a new business plan later this month. We anticipate a short-term bounce on the news, which would present trading portfolio managers with an opportunity to exit.
