We are reiterating our OUTPERFORM rating on Pacific & Orient
(“P&O”) with an unchanged target price of RM1.60, valuing the group at an
undemanding FY13 EPS of 6.0x. With its existing fundamentals already undervalued
by the market, the stock’s worth could rise even further on a M&A theme.
The biggest South African insurer, Sanlam has submitted an application to BNM
to start negotiation with P&O for a potential acquisition stake in
P&O’s insurance business. We value P&O’s insurance assets in the range
of 2.0-2.5x its 30 June 2012 BV of RM0.92 on the M&A theme, which is
similar to recent transactions valuation on similar M&A deals.
Latest news a boost. South African Insurer, Sanlam has on 7 September
2012 submitted an application to BNM for
the approval of the Minister of Finance pursuant to the Insurance Act
1996 to review a proposal to enter into an agreement with P&O for the
possible acquisition by Sanlam of P&O’s 49% equity interest in Pacific and
Orient Insurance (“POI”). Earlier on, the media had reported that Sanlam, which
is South Africa’s largest financial services provider, was exploring a price
tag of over two times the net assets of the company (POI). In a separate report, Sanlam said it is in
talks for an acquisition in Malaysia, where it could use some of its 4b rand
(RM1.5b) in surplus capital according to its chief executive Johan van Zyl. Van Zyl said Sanlam is also interested in Indonesia
as well.
Our take is positive.
As mentioned earlier, most foreign insurers have an acquisition strategy to
enter into the emerging markets and to expand
their presence in the ASEAN region, positioning themselves for further
profitable growth. Malaysia is a highly
attractive market with considerable economic potential and a fairly young and dynamic population. POI is a good
candidate to become a takeover target given that the group has a well
established distribution network, a niche client base and also significant
market share in the motorcycle insurance segment. All these are a perfect fit for Sanlam, which
is looking for an entry into Malaysia.
Sanlam is
strategically an ideal fit for P&O.
The key to this deal is acquiring
P&O’s leading general insurance franchise to gain an immediate access into
the Malaysian market. In addition, P&O can tap into Sanlam’s strength in
portfolio investment that should help P&O yield a higher investment income
in the future. In general, the two financial
companies complement each other and hence Sanlam represents an excellent
strategic acquisition for P&O.
Source: Kenanga
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