We believe the Malaysian Insurance Sector is undergoing a
major consolidation. This exercise
offers opportunities for foreign insurers to have a new presence in Malaysia as
well as local top firms to scale-up their market share. We have indentified Pacific & Orient (“P&O”) as the next M&A play within
this M&A theme. We do not discount the possibility of competitive bidding
war as acquisition opportunities become scarce now after AmG has proposed
acquired Kurnia Insurans. We would like
to highlight that P&O is now trading at low 0.7x FY13 P/Bv, undemanding
2.7x PER, superb 30% RoE.
The latest news. Syarikat Takaful Malaysia Bhd will consider
mergers and acquisitions to grow its market share if it finds suitable partners
for the exercise. However, this will probably materialise only from 2014
onwards when the Risk Based Capital (“RBC”) framework for takaful operators is finalised
by end-2013, cited by Group Managing Director Datuk Mohamed Hassan Kamil.
The RBC implementation for conventional insurance operators
is currently ongoing and is prompting consolidation exercises among some of the
players, he told reporters after the company’s annual general meeting.
Companies which failed to meet the
minimum capital requirements have to opt to sell and look for partners or
inject more capital and "that is when we will start exploring," he
said.
Our take on the
issue. Bank Negara
Malaysia (“BNM”) has
reiterated that it
wants to see a consolidation
of the insurance sector, with weaker insurers merging with the larger and well capitalised
players. This will expedite the consolidation of the industry in tackling over insurance
issue. Interestingly, the central
bank had also said that a higher foreign equity limit of more than 70% will be
considered for insurance companies on a case-by-case basis for players that can
facilitate the consolidation and rationalisation of the industry. Foreign
insurers that participate in the process will be accorded flexibility in
meeting divestment requirements. Lately,
top firms with general insurance business has completed their disposal of
insurance units over the last two years; these including Hong Leong Financial
Group, Pacific Mas Bhd, Jernah Asia Bhd, MAA Bhd, with Kurnia Asia Bhd being the
latest to be given the green light by BNM to dispose its insurance asset to AmG
recently.
Most foreign insurers have an acquisition strategy to enter
into emerging markets and are likely to expand their presence in the
Asia-Pacific region, positioning themselves for further profitable growth.
Malaysia is a highly attractive market
with considerable economic potential and fairly young and dynamic
population.
Local banks are also excited to acquire general insurers as
part of their strategy to grow their fee based income. Besides enhancing market
share, enlarged scale presents opportunities for cost saving and supply-chain
management leading to long-term operational efficiencies. Local banks have
started positioning to increase competitiveness for opportunities with motor
tariff now being gradually deregulated. However, after the latest AmG proposed
acquisition of Kurnia Insurans, opportunities may become harder to pursue
in the future as acquisition
opportunities become scarce.
That said, we see a good change for Pacific & Orient’s (P&O) to become a potential
takeover target given that the group has a well established distribution
network, a niche client base and a strong balance sheet as well. All these are
a perfect fit for foreign insurers who are looking for entry into Malaysia as
well as for local players looking to raise their market share. This should drive up P&O’s valuation
over the next 1-2 years based on recent acquisition valuation parameters of
recent and upcoming M&A transactions.
We are in the midst of initiating coverage on P&O with the stock now
trading at undemanding valuation of 0.7x BV for FY13 and 2.7x PER.
Source: Kenanga
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