We continue to favour the non-bank financial sector. YTD,
both our top picks in 1H2012 i.e. Malaysian Building Society (“MBSB”) and AEON
Credit (“AEONC”) have generated good returns for investors on the back of
encouraging profit growth. We continue
to maintain our Overweight rating on the Non-Bank Financial sector and adding
in Pacific & Orient (“P&O”) as well into our OUTPERFORM list. We also
currently choose P&O as the top pick for the sector for 2H2012. Our calls on the sector are now P&O (OP,
TP: RM1.30), MBSB (OP, TP: RM2.70), AEONCR (MP, TP: RM10.00) and LPI (OP, TP:
RM15.80).
The Malaysian
Insurance sector is undergoing a major consolidation. This development
offers opportunities for foreign insurers to have a new presence in Malaysia as
well as local top firms to scale up their market shares. We have identified
P&O as the next M&A play within this M&A theme. We do not discount the possibility of a
competitive bidding war as acquisition opportunities turns scarce after AmG
proposed to acquire Kurnia Insurans. This should drive up P&O’s valuation
over the next 1-2 years based on the recent and upcoming acquisition valuation
parameters. That aside, the group already has a well-established distribution
network, a niche client base and a strong balance sheet. The current and next two years will see the
group’s earnings jumping up by a 3-year CAGR of 14% (FY11-FY14), driven by huge
profits from the group’s motorcycle premium operation, which benefited from the
2010’s surge in premium rates. We also would like to highlight that P&O is
now trading at a low 0.77x FY13 P/BVand at just 3.0x PER with a superb 27% ROE.
The icing on the cake is the potential higher dividend payouts, as P&O is starting to manage its capital.
The group’s strategy is to maintain a strong and robust capital position in
supporting the overall group’s business growth and to deliver excess returns to
shareholders. We do not discount the
possibility of its share price repeating the success of Syarikat Takaful
Malaysia. Our Target Price of RM1.30 values the group at an undemanding FY13
PER of 5.0x, which is at the low end of the 5.0-15.0x 2012/13 PERs of Malaysian
general insurers.
We have downgraded
AEONC to MARKET PERFORM recently on valuation ground. The group’s loan growth and credit quality
outlook remain intact according to management, underpinned by its strong
merchant distribution platform. Going forward, we view a 30% loan growth target
in FY13 as achievable with a favourable outlook for its (i) Credit Card, (ii)
Personal Finance and (iii) Motorcycle Financing divisions. This should result in an impressive 39%
earnings growth in FY13. However, we think the current share price could have
priced in the strong earnings growth
already. At the current level, the stock offers a potential capital downside of
5% but this is offset slightly by a dividend yield of 3.2%, which brings the
potential total return to a negative 2%
over the next 12 months. We are maintaining
our target price of RM10.00 based on a targeted PER of 9.0x over its FY13 EPS
of 111.1sen.
No change in our call
on MBSB and LPI. MBSB is still aiming to disburse a total of RM8.0b of PF-I
loans. 1Q’s RM2.9b in loan disbursement already made up 36% of its full year
target. Hence, we believe its balance sheet expansion story remains intact. The
stock's valuation still looks ndemanding at 5.9x PER post-adjustment against
its banking peers of 13.0x. It also offers a 2.5% net dividend yield. We maintain our target price at RM2.70 based
on a targeted P/BV of 1.6x FY13 BV of RM1.70. Its ROE of 28.1% remains one of
the highest for financial stocks. We believe LPI’s faster-than-industry organic
growth is sustainable and its earnings have more rooms to grow. Its business
cash generation remains the strongest in the sector with an expected RM195m in
FY12, which makes it a compelling dividend play story. Apart from the strong
rise in its cash pile, positive news is that PBBANK does not need to raise new
capital anymore under the new Basel III capital requirement. This could make
LPI a good dividend paymaster going forward especially since it has no
acquisition plans in place in the short term. We estimate that this will free
up a total of RM80-90m in capital over the next few years. We reckon that LPI
could return this excess cash pile to shareholders but are only estimating
conservative assuming a payout ratio of 90% for FY12-14. We reckon that our
assumptions are achievable as the payout ratio in FY11 had surpassed 100%.
Based on our estimates, LPI could potentially pay out RM0.79-RM1.21 for FY12-FY14,
translating into net dividend yields of
6%-9%. In addition, the deployment of its surplus cash will also provide
a lever to improve its ROE.
Source: Kenanga
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