Wednesday 20 June 2012

CIMB Group Holdings - Disposing of Low Yielding Arm?


THE BUZZ
According to Reuters, CIMB may be looking to dispose of a significant portion of its existing 51% stake in its insurance joint venture, CIMB-Aviva. Meanwhile, AIA Group, Manulife and Prudential are said to be in the running to bid for Aviva’s 49% stake in the JV, which is valued at USD1bn (RM3.18bn).
OUR TAKE
Marginal contribution. CIMB-Aviva generated earnings of RM44.1m in 2011, with its conventional insurance business generating a net profit of RM31.8m and Takaful business contributing RM12.3m in net profit. Based on CIMB’s 51% stake in the JV, the latter’s contribution to group earnings is marginal at just 0.6% of 2011 earnings.
Smaller stake for a better growth prospects. The JV has not made significant strides in expanding its market share. In fact, CIMB-Aviva Assurance Bhd reported a 25.9% y-o-y decline in gross premiums in 2011. Given the marginal contribution and minimal headway made by the JV, we believe that it makes perfect sense for the group to sell a portion of its existing stake to a stronger and more reputable insurance company that can take leadership and management control to enhance the JV’s current sub-par profitability.
Maintain BUY; retaining 2012 targets. Despite the still challenging economic environment, management is retaining its 2012 targets on the back of: i) a stronger equity deal pipeline, and ii) stronger ETP-related corporate loans and bond raising growth traction. The key risk is a potential collapse in the capital market as CIMB will be the most impacted by any collapse in the capital markets given its relatively high investment banking non-interest income contribution, with a non-interest income to total income ratio of 36% vs the industry average of 24%. Maintain BUY, at an unchanged FV of RM8.53 (2.3x P/BV, 16.7% ROE). 

Source: OSK

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