We
reiterate our OUTPERFORM rating on Pacific & Orient Bhd (“P&O”) with a
higher target price of RM1.60 (from
RM1.30 previously), valuing the group at an undemanding FY13 EPS of 6.0x
(up from 5.0x previously), which is still at the low end of the 6.0-15.0x
2012/13 PER range of Malaysian general insurers. With its existing fundamentals
already undervalued, the stock could actually be worth even more on a M&A
theme. Recall that a local media had recently reported that the biggest South
African insurer, Sanlam, is eyeing a substantial stake of up to 49% in
P&O’s insurance business. We value P&O in the range of 2.0-2.5x its
FY12 BV RM1.00 on M&A theme, which is a similar valuation to recent
transactions on similar M&A deals.
The latest news a boost. The media has reported that South
African’s largest financial services provider, Sanlam, is eyeing a substantial
stake of up to 49% in Pacific and Orient Insurance (“POI”), a 100%-owned subsidiary of P&O. Sanlam is reported to be exploring a price
tag of over two times the net assets of the company and is targeting to submit documentation
for Bank Negara Malaysia’s (“BNM”) approval next month.
Our take is positive. As we have mentioned previously,
most foreign insurers have an acquisition strategy to enter into the emerging
markets and will likely 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 a fairly young and dynamic population.
P&O is a good candidate to become a takeover target given that the group
has a well established distribution network, a niche client base and a strong
balance sheet. All these are a perfect
fit for foreign insurers who are looking for entry into Malaysia as well as
local players looking to raise their domestic market share.
A rerating in the making? We believe that a potential
acquisition would be good news for P&O’s share price. This is because it
could spur speculative interests in the stock due to any potential M&A
talks. We understand that P&O is contemplating a partial divestment of
P&O Insurance, a 100%-owned subsidiary of P&O, which could reap sales proceeds
that is well above the current P&O’s implied stock market valuation. The
latest news should drive up P&O’s valuation over the next 6-12 months based
on the recent acquisition valuation parameters of M&A transactions in our
view.
That said, with or without the M&A angle, we still believe P&O already offers
a favourable risk and reward proposition.
P&O is trading at just 4.6x its core FY13 earnings and at just 1.1x
its FY13 book value. There could be upside to our profit forecasts as Hanover
RE could potentially return its excess
profits to P&O starting from 2013 as part of its previous quota share arrangement.
Good dividends too. The group offers one of the best dividend
yields of around 3.9% (net) YTD with a total of 4.8 sen gross dividends
declared for the YTD. The higher-than-expected dividend payout clearly
indicates that the group is likely to have a better earnings outlook in
2H12. All in, we believe that P&O
presents a good and underappreciated investment proposition. We see room for
further expansion in its valuation multiples with further developments on its
M&A angle as well as from its improving operating metrics.
Source: Kenanga
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