We continue to favour
the Non-bank Financial sector and continue to maintain our Overweight rating on
the sector as well as our top pick here
of Pacific & Orient (“P&O”) for 2013.
With P&O’s share price up by 50% YTD, the stock has been one of the
outperformers within the financial sector. Post-M&A, a potential special
dividend or capital repayment should rerate P&O’s share price further up in
2013. Our calls and target prices for stocks in the sector are now: P&O
(OP, TP: RM1.60), MBSB (OP, TP: RM2.70), ACSM (MP, TP: RM9.70) and LPI (OP, TP:
RM16.10). We continue to favour the general
insurance sector. Both LPI and P&O’s 3Q12 results have shown a turnaround
as compared to their 2Q12 results and came in within expectations. The sector
is undergoing a major consolidation. We maintain P&O as our pick from
within the capital repayment theme in 2013.
Our OUTPERFORM call on LPI (TP: RM16.10) and P&O (TP: RM1.60) remain
unchanged.
On 26th November, the Minister of Finance of Malaysia has
via a letter from Bank Negara Malaysia approved P&O’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, which means that the last hurdle has
now been cleared. 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.
As such, we are reiterating our OUTPERFORM rating on Pacific
& Orient with an unchanged target price of RM1.60, valuing the group at an
undemanding FY13 EPS of 6.0x. With its existing fundamentals already
undervalued by the market, the stock’s worth could rise even further on a highly
possible capital repayment (or special dividend) post the M&A. LPI Capital
meanwhile posted a 17.1% YoY growth rate in its gross written premium to
RM767.4m, driven by the fire and marine divisions. A relatively low expense
ratio gave a positive impact to the results in 3Q12 as well. The
expense-to-revenue ratio was lower at 10%, which was slightly better than
management’s guidance and our own forecast of 12%. We believe LPI’s
higher-than-industry organic growth is sustainable and its earnings have more
room to grow. Its business cash generation remains the strongest in the sector
with an expected RM195m in FY12. Our OUTPERFORM rating is retained on LPI Capital
with a TP of RM16.10 based on 15.0x FY13 PER, 2.2x BV and a 7.1% net
yield.
Companies in the
money lending sector have generally posted reasonable 3QCY12 results that were
within ours as well as the street’s expectations. Two companies under our
coverage, namely AEON Credit and MBSB, posted encouraging results with high
loan growth led by their personal financing segment. Their 4Q12 outlook is
positive as these are strong players in their own niche market segments and
have been able to capture additional market shares from their competitors. Post
their 3Q12 results, our earnings forecasts were relatively unchanged. ACSM (TP:
RM9.70) is on a MARKET PERFORM rating as we think we think its current share
price could have priced in its strong earnings growth already. We are, however, maintaining our OUTPERFORM
call on MBSB (TP: RM2.70).
MBSB had an aggressive PF-I promotion campaign in 1H2012
that has enabled the group to capture market share from its peers. The group
successfully disbursed RM9.3b of new PF-I loans for the YTD, exceeding
management’s full-year target of RM8.0b, which has helped its personal financing
loans segment grew strongly by +93% YTD that helped to cushion the flat
mortgages and corporate loans growth rates of -2.5% and +0.2% respectively.
MBSB’s balance sheet expansion story remains intact. The group, however, needs
a new capital management plan to address its relatively low Core-Capital Ratio
of 6.0% as at end-Sep12. We believe the plan could include securitization of
loans, issuance of debts and also
possible capital raising exercises. We also reckon that such a plan could be
unveiled by management by early 2013.
Source: Kenanga
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