Stock Name: AMMB
Company Name: AMMB HOLDINGS BHD
Company Name: AMMB HOLDINGS BHD
| Research House: OSK | Price Call: HOLD | Target Price: 6.20 |
THE BUZZ
AMMB announced that it has entered into a conditional saleand purchase agreement with Kurnia AsiaBhd for the proposed acquisition by AmG Insurance Bhd for a total cashconsideration of RM1.55bn, or 2.05x Kurnia's book value as at 30 June 2011.
OUR TAKE
Ties in with plans to boost motor, general insurance marketshare. The acquisition will raise AmG's general insurance market share inMalaysia from 5% to 13%, making it the largest general insurer in Malaysia withclear dominance in the motor insurance business and a market share of 22%. This ties in with its strategy to build scale and leverage onthe expertise of its partner, Insurance Australia Group, to deliver cost and revenuesynergies on a broader platform and enhance the standalone profitability of itsinsurance unit. Post acquisition, the group will have the largest insuranceagency force in Malaysia, with which it can maximize any cross-sellingopportunities.
Marginal earningsimpact. Based on AMMB's 51%effective stake in AmG Insurance Bhd, and assuming: i) zero revenue and costsynergies in the first year of acquisition, ii) acquisition to be 100% fundedby borrowings at 5% interest, and iii) an estimated average FY12/13 net profit from Kurnia of RM72.2m p.a, the impact on AMMB's bottomline in the first year of acquisition isestimated at 'RM2.7m, implying a very marginal've 0.16% impact on group earnings. Assuming that the deal is funded equally byinternal funds and borrowings, the impact on the group's earnings is estimatedat +ve 0.57%. As such, the deal should be earnings neutral at best while thecosts at the initial stages of integration may in fact be a slight drag onearnings before the group starts to reap the target revenue and cost synergies.
2.02x PBV valuationfair. From recent M&As in theinsurance industry, we noted the following: i) MAA Holdings sold its insurancebusiness for 1.36x PBV, ii) PacificMas Bhd sold its insurance business for1.71x PBV, iii) Jerneh Asia sold its insurance business for 2.25x PBV, whileiv) Berjaya Corp hived off its 40% stake in Berjaya Sompo Insurance at 3.35xPBV. Benchmarking the deal to our findings, we deem the 2.05x PBV fair.
Revenue cross-sellingsynergy may take time. Management highlighted the cross selling synergies including thepotential of marketing a full suite of banking products within the AMMB groupto urnia's 4m customer base, particularly the smaller ticket loan products like personal loans. GivenKurnia's relatively higher risk customer profile - as reflected in the group's relatively poorclaims ratio versus AMMB's more stringent risk culture - we thinkthat the upside benefits from such cross selling opportunities may take time asthe group may have to restructure and transform Kurnia's portfolio and customerbase. That said, Kurnia has to a certain extent successfully restructured itsportfolio over the past few years, with the benefits beginning to flow throughin the form of an improvement in its claims ratio from 76% to 71%.
More optimistic onimmediate cost synergies. AmG's general insurance portfolio is similar toKurnia's but its claims ratio -currently at 64.9% - is significantlybetter than Kurnia's 71%. As such, there may be great scope for improvement inthe areas of risk management and cost enhancement.
Funding in place.The acquisition is expected to be fully funded by AmG, with fresh capitalraised from a combination of borrowings and internal funds injectedproportionately by AMMB Group (51%) and Insurance Australia General GroupLimited (49%). The group has said that the there is no need for any equity fund raising to pay for theacquisition since its core capital ratios will remain intact post acquisition. MaintainNEUTRAL. We are maintaining our NEUTRAL recommendation and fair value ofRM6.20 (13.2% ROE, FY12 PBV of 1.61x).Despite there being scope for revenue and cost synergy upsidefrom the acquisition over the longer term, it is not expected to be materiallyaccretive to the group's bottomline in the immediate to medium term as theearnings contribution is expected to be NEUTRAL for the group at best for thenext two years.
Source: OSK188
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