Pacific & Orient - 1Q13 earnings broadly in line

Period    1Q13/3M12

Actual vs. Expectations  We consider the reported 1Q13 PAT of RM8.4m as broadly within our forecast (13%) based on management’s guidance that 1Q is typically the weakest quarter for the company.

Dividends   The group has proposed a special dividend of 15sen/share, which is after the disposal of its 49% stake in POI to Sanlam. We understand from management that it plans to pay a higher dividend on top of a special dividend going forward.

Key Results Highlights  On a QoQ basis,  the group’s 1QFY13 PAT was down by 58.6% to RM8.5m. The decrease was mainly driven by higher claims during the quarter.  

 YoY,  P&O registered a 1.4% YoY growth rate in its gross written premium to RM122.6m, driven by motorcycle insurance. The low single-digit revenue growth was within our expectation as well as management’s guidance as P&O already have a dominant market share in the motorcycle insurance business.

Outlook   At the current price of RM1.28, the stock is trading at a discount to its adjusted book value (BV) of RM2.30 by 44%.  We believe the discount above is not justifiable as the existing P&O’s market capitalisation of RM312m will only be 16% (RM42m) more than the RM270m cash it is expecting to receive from the proposed 49% equity stake sale of POI. 

 Post-disposal, 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 being equivalent to 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), which implies a strong 50% upside potential from here for the stock. 

 

Change to Forecasts    No changes to 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. Post disposal PER should increase to 9.2x

Valuation    Maintaining our Target Price of RM1.60, which values the group at an undemanding FY13 PER of 6.0x (or 12x post disposal).  

Risks   Unexpected MMIP losses could erode its earnings.

Source: Kenanga