CIMB and Aviva announced the widely-anticipated sale of its insurance joint venture, CIMB Aviva, for RM1.8bn to SunLife PLC and Khazanah Nasional for RM1.8bn, reflecting 3.0x PBV. CIMB’s 51% stake was sold to Khazanah for RM1.11bn via RM1.06bn in cash and RM43.5m in shares of the new insurance company. As a result, CIMB will have an eventual 2% stake in CIMB Aviva Assurance and CIMB Aviva Takaful, compared to its current 51%. We are maintaining our TRADING BUY recommendation and FV of RM8.70 (2.1x FY13 PBV, ROE: 16.1%). The stock is currently valued at an undemanding 1.8x FY13 PBV.
Attractively-priced for a relatively small player. The price of the sale is valued at 3.0x PBV and 2.4x 1H2012 embedded value while CIMB’s 51% stake itself was valued at a highly attractive 3.6x PBV, well above AIA’s acquisition of ING Malaysia’s insurance arm for 2.17x PBV and 1.80x embedded value. The attractiveness of the price was further supported by the fact that CIMB Aviva has a much smaller presence in Malaysia compared to ING’s significantly stronger branding and market share. As shown in Figure 1 and based
on Bank Negara Malaysia’s latest updated data, CIMB Aviva’s market share in new annual premiums within the individual whole life insurance segment is at 0.04% vs ING’s 17.08%, placing the former in the lowest quartile in domestic life insurance market share.
Shoring up capital ratios. CIMB is expected to realize gross proceeds of RM1.11bn from the transaction, which will help it free excess funds that can be used to shore up the group’s capital ratios ahead of Basel 3 commitments. Note that CIMB Aviva Assurance and CIMB Aviva Takaful only generated RM57.9m in combined net profit; with CIMB’s 51% stake, this equates to a net contribution of 0.7% or RM29.5m of the group’s 2012 net profit of RM4.4bn. As such, the sale is deemed to be a positive as the monetization of an unexciting non-core asset at an attractive price can be used to free up excess capital and, in the process, help to shore up core equity capital ratios at the group level.
Marginal increase in common equity ratios. CIMB Aviva was classified as an insurance associate and hence the sale of this non-core unconsolidated financial asset will free up important capital that was originally deducted from CIMB group’s Tier 1 capital. We estimate that the freeing up of RM1.11bn from the sale will help raise the group’s estimated Common Equity Tier 1 Ratio by an estimated 44 bps to 8.44%. As CIMB Aviva is not classified as a non-financial commercial subsidiary, it did not have to set aside a highly
punitive 1250% risk weight in the beginning which means that the sale will not significantly improve its asset risk weighting.
punitive 1250% risk weight in the beginning which means that the sale will not significantly improve its asset risk weighting.
Source: OSK
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