News Pacific & Orient (P&O) has announced
an interim dividend of 2 sen less 25% tax, with the ex-date on 1st of August
and payment on 23rd of August.
YTD, P&O had already earlier declared four interim dividends
to shareholders, these included net dividend of 0.6sen (in Jan 2012), 1.73sen
(March), 0.98sen (May) and the latest 0.015 sen in July.
P&O has achieved a payout ratio of 35%, which is above
our forecast payout ratio of 25% for FY12.
Comments We believe the higher than expected
dividend payout clearly indicates that the group is likely to have a better
earnings outlook in 2H12 and we do not discount a possible major turnaround in
its upcoming 3Q12 result announcement in August 2012.
As we argued in our initiation note, P&O is improving the
efficiency of its capital structure and leveraging on its clean balance sheet.
The higher than expected payout proves that management is confident in the company’s
capital position.
Outlook The ability of the group to achieve a payout ratio of
35% clearly reflects the strong balance sheet that the group has. The strong
balance sheet will allow the group to move further with future equity &
debt investments as well as market share expansion in motorcycle insurance.
Its strong capital will also be able to support the group’s
business growth and deliver excess returns to shareholders.
The group offers one of the best dividend yields of around
5.5% (gross) YTD, with a total of 6.4 sen gross dividends declared for the YTD.
Increased profitability is seen from the high dividend payouts,
which will likely see the group’s ROE increasing in tandem.
We believe the group is outperforming its peers’ ROE at
above 16-27% for FY12-FY13. The ROE enhancement will further lift up the
valuations for P&O’s share price.
Forecast We are in a midst of reviewing
our dividend payout forecast pending a meeting with management, which could see
us raising our target price as well.
Rating Maintain OUTPERFORM
The current share price still offers a 14% upside potential
to our TP of RM1.30.
Valuation Maintaining our target price of
RM1.30 at an undemanding FY13 PER of 5.0x and 1.9x FY13 PBV.
Risks Unexpected catastrophic events could erode
underwriting margins.
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