Alliance Financial Group- Sells Off Investment Management Unit

THE BUZZ

AFG has proposed to dispose of its 70% equity interest, or 7.9m shares in Alliance Investment Management Bhd (AIMB), to Tan Sri Abu Talib bin Othman for a purchase consideration of RM12.3m. Tan Sri Abu Talib, who is the current chairman and the sole equity partner owning the remaining 30% stake in AIMB, has signed an agreement with KAF-Seagroatt & Campbell, which will be the end-party of the 70% stake in AIMB.

Briefly on AIMB. AIMB, established in 1995, has core activities focusing on unit trusts, corporate fund management and investment advisory services. At present, AIMB has 17 local and global funds, with assets under management (AUM) totaling RM2.2bn as of August 2012. Its net assets amounted to RM16.5m as of March 2012. The purchase consideration of RM12.3m represents 0.81% of AIMB’s AUM and a price-to-book (PBV) multiple of 1.06x.

Unprofitable business. Based on the information available, we believe that AIMB is being disposed of for the following reasons: i) the investment management division has been struggling for years to gain scale and lags behind the industry, being ranked 13th by market share in AUM as at Dec 2011, ii) its AUM has been on a decline and has shed as much as RM578m over the past two years, iii) historically low operating profit margins versus the global levels of ~32% in 2011, and iv) unimpressive net profit margins (despite an improvement to 12.6% for FY12). However, we do not rule out the possibility of a collaboration being struck with KAF’s existing fund management business, given that wealth management has been cited as a focus area by AFG’s management in the past

Impact on the group. The disposal will streamline AFG’s business and help alleviate the existing relatively high cost-to-income ratio of 50.5%. Should there be any gain on disposal arising from dropping the fund management business, we believe that the estimated RM3-RM4m would not be material as it only represents about 0.1% of AFG’s share equity. Also, as AIMB’s contribution to total segmental revenue is small, its sale may boost AFG’s profit margin. Assuming the deal goes through, what remains to be seen is management’s strategy to turn around its loss-making investment banking division (RM1.5m loss for 1QFY13).

Forecast unchanged. We retain our forecast and FV at RM4.68, pegged to 1.8x FY13 EPS, but upgrade our call to a BUY.

 Source: OSK