THE BUZZ
AMMB announced that it has entered into a conditional sale
and purchase agreement with Kurnia Asia
Bhd for the proposed acquisition by AmG Insurance Bhd for a total cash
consideration of RM1.55bn, or 2.05x Kurnia’s book value as at 30 June 2011.
OUR TAKE
Ties in with plans to boost motor, general insurance market
share. The acquisition will raise AmG’s general insurance market share in
Malaysia from 5% to 13%, making it the largest general insurer in Malaysia with
clear dominance in the motor insurance business
and a market share of 22%. This
ties in with its strategy to build scale and leverage on
the expertise of its partner, Insurance Australia Group, to deliver cost and revenue
synergies on a broader platform and enhance the standalone profitability of its
insurance unit. Post acquisition, the group will have the largest insurance
agency force in Malaysia, with which it can maximize any cross-selling
opportunities.
Marginal earnings
impact. Based on AMMB’s 51%
effective stake in AmG Insurance Bhd, and assuming: i) zero revenue and cost
synergies in the first year of acquisition, ii) acquisition to be 100% funded
by borrowings at 5% interest, and
iii) an estimated average FY12/13 net profit from
Kurnia of RM72.2m p.a,
the impact on AMMB’s bottomline in
the first year of acquisition is
estimated at –RM2.7m, implying a very marginal
–ve 0.16% impact on group earnings. Assuming that the deal is funded equally by
internal funds and borrowings, the impact on the group’s earnings is estimated
at +ve 0.57%. As such, the deal should be earnings neutral at best while the
costs at the initial stages of integration may in fact be a slight drag on
earnings before the group starts to reap the target revenue and cost synergies.
2.02x PBV valuation
fair. From recent M&As in the
insurance industry, we noted the following: i) MAA Holdings sold its insurance
business for 1.36x PBV, ii) PacificMas Bhd sold its insurance business for
1.71x PBV, iii) Jerneh Asia sold its insurance business for 2.25x PBV, while
iv) Berjaya Corp hived off its 40% stake in Berjaya Sompo Insurance at 3.35x
PBV. Benchmarking the deal to our findings, we deem the 2.05x PBV fair.
Revenue cross-selling
synergy may take time.
Management highlighted the cross selling synergies including the
potential of marketing a full suite of banking products within the AMMB group
to urnia’s 4m customer base,
particularly the smaller ticket loan products like personal loans. Given
Kurnia’s relatively higher risk customer profile - as reflected in the group’s relatively poor
claims ratio versus AMMB’s more stringent risk culture - we think
that the upside benefits from such cross selling opportunities may take time as
the group may have to restructure and transform Kurnia’s portfolio and customer
base. That said, Kurnia has to a certain extent successfully restructured its
portfolio over the past few years, with the benefits beginning to flow through
in the form of an improvement in its claims ratio from 76% to 71%.
More optimistic on
immediate cost synergies. AmG’s general insurance portfolio is similar to
Kurnia’s but its claims ratio -
currently at 64.9% - is significantly
better than Kurnia’s 71%. As such, there may be great scope for improvement in
the areas of risk management and cost enhancement.
Funding in place.
The acquisition is expected to be fully funded by AmG, with fresh capital
raised from a combination of borrowings and internal funds injected
proportionately by AMMB Group (51%) and Insurance Australia General Group
Limited (49%). The group has said that the there is no need for any equity fund raising to pay for the
acquisition since its core capital ratios will remain intact post acquisition. Maintain
NEUTRAL. We are maintaining our NEUTRAL recommendation and fair value of
RM6.20 (13.2% ROE, FY12 PBV of 1.61x).
Despite there being scope for revenue and cost synergy upside
from the acquisition over the longer term, it is not expected to be materially
accretive to the group’s bottomline in the immediate to medium term as the
earnings contribution is expected to be NEUTRAL for the group at best for the
next two years.
Source: OSK188
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