Pacific & Orient Bhd (P&O) has confirmed that it received the approval from Bank Negara to begin preliminary negotiations for a proposed disposal of stake in its insurance unit to Prudential Holdings Limited.
P&O returned to the black for FY2009 ended Sept 30, registering a net profit of RM14.9 million compared to a net loss of RM32.6 million the year before. P&O’s earnings were boosted by its insurance business — its largest contributor to revenue.
Lately, the top firms in the general insurance sector have been on the lookout for prospective mergers and acquisitions (M&A) deals. There are only so many candidates out there. The industry is in a full swing consolidation mode. It is very likely that P&O will fetch a "good price".
Would you have been able to get in below 70 sen? Highly unlikely. Unless you have insider information, we can only react to transparent developments. Many investors would look at the recent price chart and think that P&O has already "run". That is a blinkered view on investing. We have to assess what has transpired and the likely price to get the deal done. Prudential knows very well that it is not easy to even get approval from Bank Negara in the first place.
Failure to secure a deal now would be giving up an opportunity to another major competitor down the road.
In April last year, Bank Negara liberalised the insurance sector and announced that to further build the resilience and competitiveness of the insurance and takaful industry, insurance companies and takaful operators will be given greater flexibility in tie-ups with foreign partners. Accordingly, foreign equity participation in local insurance companies and takaful operators will be increased up to 70%.
Interestingly, the central bank also said a higher foreign equity limit of more than 70% will be considered for insurance companies on a case-by-case basis for players that can facilitate the consolidation and rationalisation of the industry. Furthermore, existing foreign insurers that participate in the process will be accorded flexibility in meeting divestment requirements.
Already, two listed companies with general insurance business have announced that Bank Negara has given them the green light to commence negotiations on the potential disposal of their respective insurance units. Jerneh Asia Bhd made the announcement five months ago in December while PacificMas Bhd made its announcement on April 21.
Jerneh Asia did not name the party it is in talks with but reports have noted that it is a foreign one. PacificMas, meanwhile, has disclosed that it is entering into talks with its related company Great Eastern Group. Singapore’s Oversea-Chinese Banking Corp Ltd (OCBC) is the ultimate holding company of PacificMas and Great Eastern Group. The proposed acquisition of Pacific Insurance came after Great Eastern’s wholly-owned unit, Overseas Assurance Corp (M) Bhd (OAC), started talks to possibly acquire the general insurance business of Tahan Insurance Malaysia Bhd.
Should Great Eastern successfully acquire these two local insurance businesses, say industry observers, it may continue to look for another one or two local general insurers.
Nevertheless, The Edge reported last week that while Great Eastern has received the go-ahead from Bank Negara to enter into talks with PacificMas, another foreign insurer is eyeing the insurance business of PacificMas as well, but has undertaken its own studies on the business before it decides whether to buy and write to Bank Negara for approval to start formal talks.
Foreign insurers are keen to grow and at the same time help in the consolidation of the general insurance industry here. While they are at it, they are also hopeful that they will be able to hold a higher stake in their investment in insurance companies here and not have to pare down their respective stakes.
About half of the 32 general insurance companies in Malaysia registered a turnover in 2009 of less than RM300 million a year. Even among the top players, only one — Allianz (General Insurance Malaysia Bhd) — had a turnover in excess of RM1 billion. Therefore, with so many players and the industry growing by around 7% per year, the segment is due for consolidation. Total market turnover was only RM11.5 billion in 2009 compared to RM10 billion in 2007,” he adds.
The 10 top general insurers in Malaysia are Chartis Malaysia Insurance Bhd (formerly AIG General Insurance (Malaysia) Bhd), Allianz, AmG Insurance Bhd, Berjaya Sompo Insurance Bhd, Etiqa Insurance Bhd, Kurnia Asia Bhd, Lonpac Insurance Bhd, MAA Assurance Bhd, MSIG Insurance (Malaysia) Bhd (a subsidiary of Mitsui Sumitomo Insurance Company Ltd) and Tokio Marine Insurans (Malaysia) Bhd. They command a collective 60% of the local market.
Bank Negara reiterated that it wants to see a consolidation of the insurance sector, with vulnerable insurers merging with the larger and well-capitalised players. Governor Tan Sri Zeti Akhtar Aziz said the central bank, after stopping the issue of new licences, was encouraging insurance players to merge.
P&O is well positioned to benefit from industry dynamics and regulatory shifts by leveraging its niche customer base, well organised distribution network, improving infrastructure and high rated underwriting culture. These key strengths pave the way for P&O to be an attractive M&A target for foreign insurers seeking to gain a foothold in Malaysia.
Kenanga sees a 25% upside to their base case valuation of RM 1.15. This values the group at an undemanding FY2011 PER of six times, which is at the low end of the six to 15 times 2010/11 PER of Malaysian general insurers.
P&O has an M&A valuation of RM1.65. Kenanga hinted that although there is already substantial price upside to our their case valuation, the stock is worth even more on an M&A basis. Kenanga values P&O in the range of 1.5-2 times FY11 P/BV, which is in comparison with first phase consolidation of Malaysian banking sector.
P&O has only 211m shares (after its recent share split on 19th July 2010) which makes the trading volume activity over the last 3 days extremely good. I like the recent higher lows, recently at RM1.06 and then at RM1.15. That is a classic buying absorption indicative of a significant upside move very soon. I think this represents more than just a good trade at current levels of RM1.20-RM1.25. In a sale, we will be looking at Book Value, as its at 1.1x-1.15x at the moment. Any deal is likely to be at least 1.5x PB. Looking for 20%-30% upside.
NOTE: The above opinion is not an invitation to buy or sell. It serves as a blogging activity of my investing thoughts and ideas, this does not represent an investment advisory service as I charge no subscription or management fees (donations are welcomed though). The content on this site is provided as general information only and should not be taken as investment advice. All site content, shall not be construed as a recommendation to buy or sell any security or financial instrument. The ideas expressed are solely the opinions of the author. Any action that you take as a result of information, analysis, or commentary on this site is ultimately your responsibility. Consult your investment adviser before making any investment decisions.
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