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Potential overhang well mitigated by adequate bond conversion maturity period.
KUALA LUMPUR: CIMB Group 's share price fell to a low of RM5.18 and weighed on the FBM KLCI on a potential share overhang from the proposed issuance of exchangeable bonds by Khazanah Nasional.

At 11.45am, it was down 12 sen to RM5.22 with 26.25 million shares done.

The FBM KLCI was down 5.64 points or 0.34% to 1,673.62. Turnover was 1.51 billion shares valued at RM965mil. There were 356 gainers, 329 losers and 379 counters unchanged.

UOB Kay Hian Malaysia Research said  Khazanah plans to raise US$500mil by issuing exchangeable bonds in the country's second largest bank by assets.

The exchangeable bond, which matures in 2024, can be converted into ordinary shares, the term sheet shows.

Khazanah currently holds a 27% stake in CIMB. Proceeds from the sale will be used to refinance borrowings and meet working capital needs.

The research house said the amount that Khazanah is seeking to raise could give rise to a 4% stake dilution (assuming a one for one conversion ratio).

The bonds will only mature in 2024 which does ease concerns of any potential share price overhang arising from the conversion by bond holders.

“We also note that by 2024, CIMB would be at the tail end of its current 5-year transformation and should start to reap the benefits of higher productivity and ROE from its on-going digital spend which is expected to be front loaded within the first five years of its transformation programme.

“As such, impact of the overhang is likely to be well absorbed by the market as ROE trajectory starts to gain greater traction by 2024,” it said.

“Potential earnings recovery from stronger loan growth from CIMB Niaga coupled with attractive valuations could help drive share price recovery in 2019. Share price has declined 13% over the past one year despite ROE remaining relatively stable at 9.6%.

“As such, valuations have declined to a rather attractive 0.89x 2019F price-to-book and 9.7 times 2019F PE (-1SD below 10-year mean) while supported by a attractive dividend yield of 4.5%,” it said.
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