We  have  updated  our  earnings  model  to  incorporate  newly-acquired WHB  and  OCBC's  1-for-8 rights issue.  A  full 12-month impact in FY15 would dilute EPS by 5%, lower ROE to 11.6% from an  earlier forecast of 12.3%  and  fully-loaded  CET-1 ratio  cut  to 10.1% vs  12-12.5% of peers. We adjust GGM-based TP to SGD10.55.  We maintain a NEUTRAL rating as concerns over OCBC's weaker capital position vs peers would weigh on share price performance.  

Earnings  model  update.  With  the  voluntary  general  offer  (VGO)  for Wing Hang Bank (WHB) completed in late  July and the 440 million new OCBC shares from the 1-for-8 rights issue  (RI)  targeted for issuance on 26 Sept, we have adjusted our earnings model for inclusion of the Hong Kong lender and the capital raising  exercise.  The company expects the compulsory  acquisition  and  delisting  process  for WHB  (to  be  renamed OCBC  Wing Hang from 1 October) to take 2-3 months.  

A  5%  dilution  in  FY15F  EPS.  Based  on  our  projections,  a  5-month contribution  from  97.5%-owned  WHB  in  FY14F  would  lift  OCBC's  net profit  by 4%  to  SGD3,357m,  while  a full 12-month impact would  boost FY15F  earnings  by  8% to  SGD3,712m.  However,  the  11%  increase  in issued  capital  following  the  rights  issue  would  dilute  EPS  by  5%  to SGD0.94 in FY15F with a 3% cut to SGD0.90 for FY14F.  

ROE trimmed by 70bps and CET-1 by 190bps.  The rights issue would also lower ROE to 11.6% from 12.3% for FY15F with a modest 20bps cut  to  12.2%  for  FY14F.  Goodwill  arising  from  the  acquisition  of  circa SGD2.85bn, would trim common equity tier-1 (CET-1) ratio by 190bps to12.8%  (transitional)  from 14.7% (June). We estimate fully loaded CET-1 at  10.1%  vs  12-12.5%  of  peers.  Recall  that  management  does  not expect the acquisition to be EPS and ROE accretive until FY17.

TP  adjusted  to  SGD10.55,  NEUTRAL.  Our  Gordon  Growth  Model(GGM)-derived  TP  is  adjusted  to  SGD10.55  (from  SGD10.75)  after factoring in lower  ROE  and  higher  weighted  average  cost of  capital  of 9.7% (from 9.3%).  NEUTRAL rating maintained. While we view  the EPS dilution as manageable and ROE is within management's target of 11-12%,  we  believe  concerns  over  its  weakened  capital  position  would weigh on share price performance.

 

Source: OSK-DMG