Kenanga: The AmGeneral Insurance deal could be underpriced

AT a glance, the cash proceeds from its disposal of AmGeneral Insurance Bhd (AIGB) to Liberty Insurance Bhd will come in handy to meet AMMB Holdings Bhd’s capital needs in its 1Malaysia Development Bhd (1MDB) RM2.83 bil global settlement.

On the other hand, however, this would also result in the group having a much lesser involvement in the general insurance business given its compounded share from an enlarged Liberty Insurance operation will be worth a mere 30% exposure, according to Kenanga Research.

On Monday (July 19), AMMB announced that its 51%-owned AmGeneral Holdings Bhd has proposed the disposal of AIGB to Liberty Insurance at a price tag RM2.29 bil (100% stake; subject to adjustment).

The deal will be satisfied via a combination of cash and a 30% stake in Liberty with which AIGB would form the largest motor insurer and second-largest property and casualty insurer in the country.

The remaining 49% stake in AIGB owned by the Insurance Australia Group Ltd appears to be earmarked to be sold to Liberty at A$340 mil (RM1.05 bil), hence suggesting that AmBank’s share of the deal amounts to RM1.24 bil.

Following the completion of the merger, AmBank will benefit from an exclusive 20-year new bancassurance partnership with the combined entity to distribute general insurance products.

“However, the deal could be underpriced as it implies a multiple of 1.42 times based on AIGB’s 1H FY2021 book value of RM1.62 bil which appears to be at a discount compared to the trading average of listed insurers at two times,” opined analyst Clement Chua in a company update.

“Further, the deal is still subject to adjustments, so further haircuts could possible.”

All-in-all, Kennaga Research maintained its “market perform” rating and target price of RM2.85 on AMMB.

“At current price points, we believe the risk-to-reward for AmBank is well balanced. As the group moves past the global settlement and kitchen sinking saga, investors may relook the stock as it regains fundamental stability,” projected Kenanga Research.

“That said, it currently offers less comparable returns in relation to its large-cap peers but could be well appreciated if it builds on its strong asset quality (gross impaired loan less than %) and registers strong recovery traction.”

Based on its analysis, CGS-CIMB Research expects the deal to reduce general insurance contributions to AMMB’s net profit in the longer term given the lower net profit from Liberty Insurance (RM41.2 mil in FY12/2019) vs that for AGI (RM248.4 mil in FY3/2020).

“Also, we do not project a significant increase in Liberty Insurance’s net profit in the longer term,” reckoned analyst Winson Ng.

As a whole, CGS-CIMB Research retained its “reduce” call on AMMB due to potential share price overhang (following the private placement) which will de-rate the stock.

“The private placement which led to an issuance of 300 million new shares and increased its share base by 10%, was completed on April 14 and fully factored into our forecasts,” noted the research house.

“We also retain our FY2022-2024F EPS (earnings per share) forecasts and DDM (dividend discount model)-based target price of RM2.63. We prefer Public Bank Bhd for exposure to the Malaysian banking sector.”

At 9.55am, AMMB was down 1 sen or 0.34% to RM2.91 with 209,100 shares traded, thus valuing the company at RM9.64 bil. – July 21, 2021

 

Photo credit: Nur Ismail Photography

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