CIMB GROUP HOLDINGS Insurance unit sale may yield better-than-expected gain

- The press has been reporting that Sun Life Financial from Canada, and Malaysian state investment unit Khazanah Nasional (Khazanah) have agreed to buy Aviva’s Malaysian insurance joint venture with lender CIMB – CIMB Aviva – for about RM1.7bil (USD563mil). Recall CIMB Aviva is a joint venture, with CIMB holding a 51% stake and Aviva plc the remaining 49% stake.

- Earlier in June 2007, CIMB had then sold the 49% stake of the life insurance and takaful units to Aviva for RM500mil. The gain on sale then was reported to be RM350mil. Based on this, we have estimated that CIMB’s book value of its 51% stake in the life and takaful units at RM156mil then.

- The insurance division’s PBT was reported at RM31mil in FY07, -RM95.0mil in FY08, RM3.0mil in FY09, RM66mil in FY10 and RM8.0mil in FY11. These may also include its other insurance unit, PT CIMB Sun Life, in which CIMB has an effective 51% stake. (PT CIMB Sun Life is a joint venture with Sun Life in Indonesia). But in any case, we have assumed that the insurance division’s PBT between FY07 and FY11 was wholly related to CIMB Aviva. CIMB Aviva’s 9MFY12 PBT was reported at RM37.5mil.

- Thus, the accumulated PBT would then be RM50.5mil, implying an accumulated net earnings of RM37.9mil. Assuming no dividend payment, this means that the book value for CIMB’s 51% stake in CIMB Aviva would have increased to RM194.0mil currently. 

- Based on press reports, CIMB’s 51% stake would then be worth RM867mil. This means a possible gain from sale of RM867mil, less book value of RM194mil, or RM673mil.

- However, recall also that CIMB had earlier realised a deconsolidation gain of RM250mil in 4QFY11, when it ceased control then. The cessation was through changes to the board in 4QFY11, and with this, CIMB is considered to no longer have control over CIMB Aviva despite having a 51% stake. The revaluation surplus was based on a range of revaluation estimates to include gains in the business over the years since CIMB gained control of CIMB Aviva up to the cessation date.  

- Thus, the net gain would have to exclude the RM250mil already recognised, leading to a possible net gain of RM423mil. This is still better than expected, in our view. Maintain BUY.

Source: AmeSecurities