AMMB Holdings - Buying back 30% of its life businesses

News   AMMB Holdings Berhad (“AMMB”) has obtained the approval of Bank Negara Malaysia (“BNM”) to commence negotiations with Friends Life FPL Limited (“Friends Life”) for the repurchase of a 30% equity interest held by Friends Life in its two joint ventures, namely in AmLife Insurance Berhad (AmLife) and AmFamily Takaful Berhad (AmTakaful).

Recall that Friends Life’s joint venture partnership with AmBank Group commenced in December 2008, with the acquisition by the former of a 30% shareholding in AmLife.

The joint venture subsequently extended to family Takaful in December 2011, with a further investment by Friends Life of a 30% stake in AmTakaful.

Comments   The proposed repurchase allows both AMMB and Friends Life to pursue separate strategies to enhance their respective businesses.

AMMB remains committed to the continued growth of AmLife and AmTakaful. This will enable AMMB to focus on opportunities unique to the group’s business model.

Notwithstanding this, Friends Life said it would continue to provide technical support to AmLife and AmTakaful over an agreed period of time.

However, we do not discount the possibility of AmLife and AmTakaful being injected or merged with AmG insurance Bhd, a 51%-owned general insurance subsidiary of AMMB, later in a move to create a single entity for the group’s insurance business.

The potential enlarged scale of operation should present opportunities for cost savings and supply-chain management leading to enhanced medium term operating efficiencies.

Note that the group will require the prior approval of the Minister of Finance before signing any definitive agreement on the proposed repurchase above.

Outlook   The group is maintaining its medium term aspiration (FY13- 15) to grow its PAT by a 9%-12% (CAGR) range with a loan growth target of 8%-9% as well as a ROE target range of 14%-15%.

We believe these targets are reasonable and achievable, supported by a projected dividend payout ratio in the range of 40%-50%. We believe its strong balance sheet capability with a 9.3% Core Capital Ratio will enable the group to support the dividend payout ratio as mentioned above. Hence, we do not foresee its earlier Kurnia Insurance and MBF Cards acquisitions to have a negative impact on the group’s dividend payout capability.

Forecast   We are maintaining our FY13E PAT forecast of RM1,697.6m and FY14E forecast of RM1,903.3m.

Rating   MAINTAIN OUTPERFORM

We are maintaining our OUTPERFORM rating. Our target price implies a potential total return of 20.3% (together with a 5.7% net dividend yield).

Valuation   We are also maintaining our AMMB target price at RM7.40 based on 1.7x FY14 book value of RM4.40. The TP implies a 11.7x FY14 PER.

Risks    Tighter lending rules and a margin squeeze.

Source: Kenanga