Non-Bank Financials - Still Exciting

We continue to favour the Non-bank Financial sector and continue to maintain our Overweight rating on the sector as well as our top pick here on Pacific & Orient (“P&O”) for 2H2012.  With P&O’s share price up by 40% YTD, the stock has been one of the outperformers within the financial sector. Continuous on M&A news on the company should rerate P&O’s share price further up in the 4Q. Our calls and target prices for stocks in the sector are now P&O (OP, TP: RM1.60), MBSB (OP, TP: RM2.70), ACSM  (MP, TP: RM9.70) and LPI (OP, TP: RM16.10). 

Companies in the sector have generally posted reasonable 2QCY12 results that were within ours as well as the street’s expectations.  Two companies under our coverage, namely AEON Credit and MBSB posted encouraging results with high loan growth led by the personal financing segment. Their 4Q12 outlooks are positive as these are strong players in their own niche market segments and have been able to capture additional market shares from their competitors. Post-2Q12 results, our earnings forecasts were relatively unchanged. ACSM (TP: RM9.70) are MARKET PERFROM as we think we think the current share price could have priced in the strong earning growth already.  We are maintaining our OUTPERFORM  call  on  MBSB  (TP: RM2.70). 

MBSB  is aiming  to disburse a  total of RM8.0b of PF-I  loans. The group adopted the tactical strategy of a zero-transfer promotion campaign in  1H12 in its efforts to grow its loans. In total, RM4.7b of PF-I loans were disbursed in the 2Q  (vs. RM2.5b in the 1Q) with an aggregate total loan disbursement of RM7.2b in 1H12. Hence, we believe its balance sheet expansion story remains intact. Meanwhile, the group has a low 6.6% Core-Capital Ratio and Tier-1 Capital Ratio of 10.5% as at end-June. A new capital management plan is needed to continue to support the group’s high balance sheet growth for 2013. The plan will likely include securitisation of loans, issuance of debts and also possible capital raising exercises. We think the exact route under such a plan will be unveiled by the management by the end of this year and should be EPS-accretive.

Meanwhile, we continue to favour the general insurance sector. Both LPI and P&O’s 2Q12 results have shown a turnaround as compared to their 1Q12 results and were within expectations. The sector is undergoing a major consolidation.  We  maintain  P&O  as  our  pick  within  its  M&A theme.  Our OUTPERFORM call on LPI (TP: RM16.10) and P&O (TP: RM1.60) remain unchanged.

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. Sanlam is strategically an ideal fit for  P&O.  The  key  to  this  deal  is  it  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, which should help P&O yields 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. As such, 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.

LPI Capital posted a 19.2% YoY growth rate in its gross written premium to RM268.5m, driven by the fire and marine divisions. A relatively low expense ratio provided the results a positive impact in 2Q12 as well. The expense-to-revenue ratio was lower at 10%, which was slightly better than management’s guidance and our own forecast of 12%. We believe LPI’s higher-than-industry organic growth is sustainable and its earnings have more room to grow. Its business cash generation remains the strongest in the sector with an expected RM195m in FY12. Our OUTPERFORM rating is retained on LPT Capital with a TP of RM16.10 based on 15.0x FY13 PER, 2.2x BV and a 7.1% net yield. 

Source: Kenanga