Monday, October 17, 2011

Merger between OSK (RM1.79; TP>RM2.20) and RHB Cap

BNM had just given approval to OSK and RHB Cap to start talks on possible merger of the two firms. Dateline is 3 months from 13 Oct 2011. OSK share price had a good run since its announcement of its application to commence merger talks with RHB Cap on 29th Sept, surging from RM1.39 in Sept 29 to RM1.79 today. Will its shares have further leg for upside from current price? It depends on the likelihood of the takeover and the pricing.

The merger is in line with RHB Cap’s intention to expand its investment banking operations and RHB intends to follow the footsteps of its peers such as Maybank and CIMB. RHB Cap is currently the third largest broker while OSK is the fourth largest. Thus a merged entity of the two firms would make RHB the largest broker in Malaysia with a market share of 13.6% vs CIMB’s 10.5%. In addition, the merger would allow RHB Cap to expand overseas through OSK’s exposure to markets in Singapore, Indonesia, Hong Kong, China and Cambodia fast. Or else, it will take years for RHB Cap to expand organically. The major shareholder of OSK, Ong Leong Huat, was rumored as having the intention to sell OSK since last year but only at a substantial premium, perhaps around 2x book value (This rumor was heard last year. Times had changed since then, thus 2x book value would be less likely than last year). In addition, BNM seems supportive of a merger between the two looking at its rather quick response in approving the merger talks. 

Pricing could be around 1.4x to 1.9x book value of OSK, or takeover price of RM2.20 to RM3.00. Maybank recently acquired Kim Eng at 1.9x book value while CIMB acquired GK Goh at 1.2x book value. Besides, Kim Eng tried to acquire Inter-Pacific Securities at 1.4x book value. Since OSK is much larger and more established than Inter-Pacific Securities but trails behind Kim Eng, OSK’s takeover price could be anything between 1.4x to 1.9x. However, this depends also on whether OSK’s Ong would be willing to let go at any price below 1.9x book value. 

Let’s see how this deal pans out. In view of this friendly takeover being in line with RHB Cap’s regional expansion plans and Ong’s intention to sell OSK with BNM being supportive of it, it’s likely that the deal will go through. The deal will likely involve some share swap, maybe half cash half shares. Potential upside for OSK stock price would be at least 22% assuming that takeover price would be at least 1.4x book value. Holding period: 3 months

Market Data - OSK

Shares issued: 963.6 mil
Stock price: RM1.79  
Market Cap: RM1,725 mil  
P/BV: 1.14x  
Trailing 12M PER: 13.7x

Friday, October 7, 2011

Will this rally hold? - Justin Bennett

Will This Rally Hold?
by Justin Bennett, Editor

How would you describe the stock market right now?

Maybe the words uncertain, volatile, and stressful come to mind.

European debt worries have investors the world over pulling their hair out.  And it’s painfully obvious, the US stock market is being held hostage by the ominous possibility of a Greek default.

When will all this madness end?

If you can find somebody with a definite answer to that question, you can safely assume they’re full of hot air.


Because no one knows with absolute certainty when all these worries will finally come to a close.  There are simply too many variables and unknowns, which is precisely why investors are so worried.

In my opinion, there are too many European politicians and bankers with their hands on the steering wheel.  And they’re all trying to steer the problem solving process in different directions.

You can call it the ‘too many cooks in the kitchen’ syndrome.

Everybody has an idea on what to cook, but nothing goes in the oven. And this lack of leadership and decisive action is taking its toll on global markets.

But beneath all this uncertainty, there’s a glimmer of hope…

The markets have risen the past two days on hopes European politicians will finally pull their heads out of their you know what.  A plan to recapitalize and backstop European banks is giving market bears a reason to start covering their short positions.

And that’s fueling a market rally.  In fact, the S&P 500 is up over 5% from its lows on Tuesday.

So does that mean it’s safe to dip your toe into this market?

I think it is…

However, let me be abundantly clear… we’re not out of the woods yet with Europe’s debt problems.  Even it the market finds a way to deal with the issues in Greece, there are other European countries in the same boat.

We’ll be hearing about Europe’s problems for months… if not years.

But here’s the kicker…

If European politicians can get their act together and develop a viable battle plan, we could see some of the worry dissipate from the markets.  And that could lead to a nice fourth quarter rally for stocks.

You see, the 20% plunge in the S&P 500 from the 2011 highs has been quick and unforgiving.  But the gut-churning move has also priced a lot of worrisome news into the market.

In my opinion, a slowing US economy and much (but not all) of the Greek default worries have been discounted.  A controlled default would actually be good news at this point!

And if we get some ‘better than expected’ data about the US economy in coming weeks, a nice year-end rally could restore investors' confidence.

Remember that shopping list of stocks you want to own?  I urged you to put together your list a few weeks ago.  Go ahead and start nibbling at some of those undervalued stocks right now.

But keep an eye on this important technical level…

I’m talking about the low set this past Tuesday morning.  Take a look…

SPX Chart

The green line marks 1075 on the S&P 500, a key level of technical support.  If the market can keep from closing below that level in coming days, it’s safe to stay in the market.

But if the S&P 500 closes below 1075, exit your position and wait for a better entry in coming weeks.

It all comes down to this right now…

Stocks are just too undervalued not to take a chance on them right now.

Whatever you do, don’t load the boat on stocks just yet.  But given how far they’ve fallen recently, even a small position can lead to nice profits in coming months.