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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