OCBC Bank

Kim Eng on 10 Jul 2014

• With Elliott Capital Advisors in the picture, the privatisation bid for Wing Hang Bank looks challenging.
• A higher offer price for WHB would be negative; we think OCBC is likely to keep its stake at 75% before embarking on its second privatisation bid for WHB a year from now.
• Negative view reinforced; reiterate HOLD.

Possible scenarios for WHB acquisition
The move by Elliott Capital Advisors to accumulate up to 7.8% stake in Wing Hang Bank (WHB) could throw a spanner on OCBC's bid to take WHB private, which requires at least 90% acceptances.
In our view, the two possible outcomes are:

Outcome #1: OCBC receives less than 90% acceptances but more than 75%. OCBC is required to sell anything in excess of 75% as per the listing requirement that stipulates a minimum 25% free float.
We expect WHB's share price to collapse to HKD83 (1.2x P/BV), its last traded price before the M&A excitement emerged. This represents a 33.6% downside from the offer price of HKD125. OCBC could incur losses as much as SGD311m, equivalent to 1.4% of its core equity Tier 1. From a P&L standpoint, the impact is modest but it could reduce management flexibility.

Outcome #2: Under a worse-case scenario, OCBC raises the offer price such that WHB can be taken private. In our view, this is an unlikely outcome as it could put management's credibility at risk.
Already, the share price of OCBC has suffered and the earlier guidance of EPS and ROE accretion by FY17E could be pushed back. We think OCBC is more likely to keep its shareholding at 75% before embarking on its second privatisation bid a year later. This saga reinforces our negative view on the stock Our SGD9.63 TP is based on 1.24x FY14E P/BV, equivalent to 1SD below its historical P/BV average since Jan 2005.