Wednesday 19 December 2012

Pacific & Orient - Value keeps on emerging


We reiterate our OUTPERFORM rating on Pacific & Orient (“P&O”) with an unchanged target price of RM1.60, valuing the group at a reasonable FY13 EPS of 6.0x (or 12.0x PER postdivestment).  The group has earlier entered into a  conditional share purchase agreement for the proposed sale of its 49% equity interest in Pacific & Orient Insurance (“POI”) to Sanlam Emerging Markets Propriety Limited (“SEM”) for a total cash of RM270m. vis-à-vis its book value of RM110m as of 30September 2012, this transaction valued P&O’s insurance assets at 2.46x, which is at the higher end of recent similar M&A transactions.  We believe the proposed disposal of its insurance business is timely and attractively valued. The share price has not fully reflected the boost from this recent disposal. The likely capital repayment exercise going forward could further rerate the stock in our view.   

Latest signing is a boost. Recall that on the 26th of November, the Minister of Finance of Malaysia had via a letter from Bank Negara Malaysia approved the group’s proposal to dispose its 49% equity interest in Pacific & Orient Insurance (“POI”), a 100%-owned subsidiary of P&O, to Sanlam  Emerging Markets Propriety limited.  Both parties have subsequently  agreed to POI’s 49% equity stake valuation at RM270m (2.46x BV) and to the signing of an SPA. 

P&O will see cash proceeds of about RM270m with RM174m in gains. The final valuation of 2.45x above is 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 partly redistributed to shareholders according to management.  At the current price of RM1.27, the stock is now trading at a discount to its adjusted book value (“BV”) of RM2.30 by 42%.

Our take is positive. Sanlam is strategically an ideal fit for P&O.  The rationale for it in this deal is to acquire 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 and this  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.  

Value searching.  At the current price of RM1.32, the stock will trade at a discount to its adjusted book value (“BV”) of RM2.30 by 42%.  We believe the current discount above is not justifiable as the existing P&O’s market capitalisation of RM325m will only be 20.3% (RM55m) more than the RM270m cash it is expected to receive from the proposed 49% equity stake sale of POI. 
Post-disposal, if the sale goes through, P&O will still have a 51% controlling stake in POI as well as its IT business. With the total cash proceeds from the potential disposal of RM1.10/share, the fair valuation of P&O should be pegged at RM1.90 (by adding in the fair value from the 51% stake left in POI), implying a strong 50% upside potential from here. 
Our valuation is based on a Sum-of-Part valuation methodology.  This means that at the current price, investors will be getting the cash of RM1.10/share and the remaining 51% stake of POI at a substantial discount of 79% to its BV/share. These assets could be worth as much as RM0.79/share or even more as this valuation only implies a 6.0x FY13x PER. 
We believe the partial disposal of the general insurance business is timely and attractively valued. Currently, the share price has not fully reflected the above disposal. Should there be any capital repayment exercise going forward, the stock could be further rerated in our view. Already, the group offers one of the best dividend yields of around 4.9% (net) YTD with  a total of 6.22 sen net dividends declared for the YTD. The higher-than-expected dividend payout clearly indicates that the group is likely to have a better earnings outlook in 2013.    

Source: Kenanga

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