AMMB Holdings - OUTPERFORM: Targeting Kurnia Insurance

AmG Insurance Bhd (AmG), a 51%-owned general insurance subsidiary of AMMB Holdings Bhd (AMMB) said it had on 4 April 2012, received Bank Negara Malaysia’s (BNM) notification (dated 3 April 2012) that the Minister of Finance had granted approval to it pursuant to section 67 of the Insurance Act 1996 for it to commence talks to acquire the 100% equity interest held by Kurnia Asia Bhd (KAB) in Kurnia Insurans (Malaysia) Bhd (the Proposal). We are mildly positive on the move although there are no details available at this juncture. We continue to maintain our OUTPERFORM rating on AMMB with an unchanged target price of RM6.70 (based on 1.6x its FY13 BV of RM4.16). 

To acquire Kurnia Insurance?  No details are available on the Proposal until probably the signing of a definitive agreement between AmG and KAB later if talks are successful.   We are mildly positive on the move.  The acquisition makes strategic sense with a market share enhancement and AmG will become a dominant player in the motor and general insurance business post acquisition.

Potential acquisition price? At this juncture, the group has not revealed any details on this potential acquisition. However, KAB is now trading at 2.24x BV with a market cap of RM900m and at the higher end of recent transacted acquisition multiple range of 1.4x-3.4x BV.  

Financial impacts. Based on FY12/13 consensus PAT estimate of RM69m, and assuming total investment cost of RM900m with a 75% debt financing structure at a financing rate of 4%, our calculation shows that this acquisition will only enhance AMMB’s FY13 earnings by 1% (see figure 1). Hence, we believe the deal will have a neutral impact to AMMB’s profit. However, we do not rule out the possibility of capital injection post acquisition. Recall that Zurich Financial injected a further RM516m into MAA’s business in order to bring its capital level up to the regulatory requirements after it bought over MAA for RM344m in September 2011.

Valuation unchanged.  Given  that  the  proposal  is  still  in  the progress of negotiation and our mildly positive view on the move above to acquire Kurnia Insurance, we continue to maintain our OUTPERFORM rating on AMMB with an unchanged target price of RM6.70 based on 1.6x FY13 BV of RM4.16.  

Source: Kenanga