Wednesday 17 October 2012

CIMB Group Holdings - Possible stake sales in non-core assets


We understand that the disposal of 51% subsidiary stake in the CIMB Aviva could be concluded before end of the year. The increase of equity from the one-off gain will further support its balance sheet growth over the next 12-24 months, in our view. We are maintaining our target price of RM8.20, translating to 2.0x FY13 PBV, which is at a -1SD level or 10% discount to its 3-year PBV average of 2.2x, as the share price performance could be capped by the upcoming general elections risk over the next 3-6 months. Our TP also implies a 12.7x FY13 PER. OUTPERFORM.

Disposing CIMB Aviva. Aviva is planning to sell its 49% stake in CIMB Aviva, a joint-venture with CIMB, to exit its non-core markets. This could be the second biggest transaction after ING sold its Malaysian life insurance unit to AIA recently for USD1.68b (at a valuation of 2.2x 2Q12 BV or 16.9x FY11 net earnings). We understand that CIMB could also partially dispose its stake in this less profitable JV as well as we understand that bidders are asking for a block of controlling stake, which will allow the group to enjoy a one-off transaction gain and to raise capital at the same time. As such, coupled with limited dilution from BoC and RBS acquisitions, the possibility of equity issuance is clearly denied.

Bidders here are likely attracted by CIMB's branch network across the country as well as its ASEAN presence to sell bancassurance products to the bank's customers. As such, it is possible to see a potential strategic alliance agreement between the winning bidder and CIMB on top of the stake sales. Such strategic alliance will allow the winner to distribute bancassurance products through CIMB Group’s subsidiaries, including CIMB Bank, CIMB Niaga, CIMB Thai as well as BOC Philippines, and create a new distribution channel that is not captured by the traditional insurance sales force.

As such, we reckon that a stake sale of CIMB Aviva could probably fetch a good valuation on top of a potential one-off goodwill payment by the winning bidder to forge the long term strategic alliance. Post-disposal, the commission charges from the sales of bancassurance products by CIMB could expand its retail-based fee income substantially over the medium to long term. This is in line with the group’s strategy and plan to raise its overseas revenue contribution to 60% by 2015, driven by the low-risk consumer segment.

The above-mentioned anticipations are in line with the industry’s past transactions. Recall that (i) CIMB sold 49% equity interests in two of its subsidiaries, namely Commerce Life Assurance Bhd and Commerce Takaful Bhd, to Aviva for a cash consideration of about RM500m in 2007, (ii) the group also previously sold its entire equity interest in Commerce Assurance (General) for RM490m cash to Allianz Group and (iii) ING has made a RM200m goodwill payment to Public Bank for a strategic alliance on the exclusive distribution of ING’s bancassurance products for 10 years.

We believe this potential corporate action could unlock the group’s value further. Its potential stake sales from CIMB Aviva and potentially one-off goodwill payment could replenish its capital after its two major acquisitions made early this year. Note that these recent acquisitions are earnings accretive over the medium-to-long term and would give CIMB a full ASEAN banking coverage. Hence, on the overall, the group is well positioned for the next Asian recovery cycle in our view.

Source: Kenanga

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