Pacific & Orient - 4Q12 earnings broadly in line

Period    4Q12/FY12

Actual vs. Expectations  The FY12 PAT of RM36.9m was broadly within our expectations (109%) and the management’s guidance.

Dividends   No dividend was declared. However, P&O had already declared a net DPS of 5.5 sen YTD vs. our estimate of 3.4 sen/share.  Going forward, the group plans to pay a higher dividend.

Key Results Highlights  On a QoQ basis,  the group’s 4QFY12 PAT was up significantly to RM20.4m. The increase was mainly driven by the write-back in allowance for receivable impairment estimated at RM5m.  The profit could have been higher had it not been for the increase in share losses incurred by MMIP.  

 YoY,  P&O registered a 3.7% YoY growth rate in the gross written premium to RM548.8m, driven by its motorcycle insurance. The low-single digit revenue growth was within our expectation as well as the management’s guidance as P&O already have a dominant market share in the motorcycle insurance business.

 Overall, we think that this is a good set of results and is on track to achieve our FY13’s RM64.6m net profit forecast. 

Outlook   We believe that M&A activities will be re-rating catalysts for P&O’s share price. On 26^th  November, Minister of Finance of Malaysia had, by a letter from Bank Negara Malaysia, approved the group’s proposal to dispose its 49% of equity interest in Pacific & Orient Insurance (“POI”), a 100%-owned subsidiary of P&O, to Sanlam Emerging Markets Propriety limited.

 We understand from management that the next step will likely to be the pricing discussion and eventual signing. 

 In fact, over the weekend, media reports had reported that P&O may sell a 49% stake in POI at 2.46x P/BV of 2.46x. Should the news materialise, P&O will see cash proceeds of about RM272m with RM166m in gains.  We believe the M&A valuation multiples speculated by the media is slightly better than our base case assumption of 2.3x BV.  This will translate into an additional book value/cash per share of RM1.38, which can be redistributed to shareholders.  At the current price of RM1.21, the stock will trade at a discount to its adjusted book value (“BV”) of RM2.30 by 47%.  

 

Change to Forecasts    No changes in our forecasts.

Rating      Maintain OUTPERFORM 

 P&O is trading at just 4.6x its core FY13 earnings and at just 1.1x its FY13 book value. 

Valuation    Maintaining our Target Price of RM1.60, valuing the group at an undemanding FY13 EPS of 6.0x.  

Risks   Unexpected MMIP losses could erode earnings.

Source: Kenanga