Bank of Queensland: It’s not just about ME
About the author:
- Author name:
- By Azib Khan
- Job title:
- Senior Analyst
- Date posted:
- 22 February 2021, 8:00 AM
- Sectors Covered:
- Bank of Queensland (ASX:BOQ) has announced that it has entered into an agreement to acquire 100% of Members Equity Bank Limited (ME Bank) for cash consideration of $1.325bn. The acquisition will be funded by an underwritten capital raising of $1.35bn at a price of $7.35 per share. We expect the acquisition to be ~10% cash EPS accretive once $80m per annum of pre-tax cost synergies are realised.
- As part of a 1H21 trading update alongside the ME Bank acquisition announcement, BOQ has said it expects 1H21 cash earnings of $163-166m. The bottom end of this range is 26% better than our expectation and ~29% better than FactSet consensus. The trading update shows a continuation of the positive themes seen in the recent round of major bank reporting.
- Recommendation is upgraded to Add. Target price increases (login to view).
Very positive 1H21 trading update
BOQ’s 1H21 trading update appears better than expectations on all fronts except expenses. The trading update is particularly impressive on the fronts of credit quality, NIM and CET1.
On a standalone basis, we have upgraded our cash EPS forecasts for BOQ by 32%/21%/12% for FY21F/FY22F/FY23F respectively as a result of the trading update.
Expecting ME Bank acquisition to be ~10% cash EPS accretive
Based on the top end of BOQ’s anticipated cost synergies range of $70-80m pre-tax and the expectation that ~75% of cost synergies will be delivered on an annualised basis by the end of the second year post completion, we expect cash EPS accretion of 3%/5% for FY22F/FY23F respectively.
Once all expected cost synergies are realised, we expect cash EPS accretion of ~10%. There are always execution risks associated with such acquisitions, however at this stage we are backing BOQ’s management team to deliver, particularly given the impressive retail bank turnaround progress seen so far under CEO George Frazis.
The risk that we will watch most closely is that of customer attrition. On the technology front, we believe the fact that both BOQ and ME Bank currently use a Temenos core retail banking platform reduces the technology integration risk.
Improved dividend outlook
We expect the combined business to deliver a cash return on tangible equity (ROTE) of 11% in FY23F. We believe the ROTE outlook has improved for BOQ with and without the acquisition, and this is resulting in an improved dividend outlook.
Assuming loan growth of 5% pa and assuming a DRP with no price discount operates, we believe BOQ can sustain a dividend payout ratio of 60%.
BOQ has today said that it is targeting a dividend payout ratio range of 60-75% of cash earnings post transaction.
Investment view and changes to forecasts
We have increased our cash EPS forecasts by 12%/24%/18% for FY21F/FY22F/FY23F respectively as a result of the 1H21 trading update and agreement to acquire ME Bank.
Our forecasts assume that the acquisition will complete at start-FY22F. We upgrade our recommendation to Add (from Hold). Our target price, based on our DDM valuation, increases (login to view).
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