This article first appeared in The Edge Financial Daily on April 23, 2018

Malayan Banking Bhd
(April 20, RM10.72)
Maintain hold with an unchanged target price (TP) of RM9.80: An article published in The Edge Financial Daily on April 19, 2018 indicated that Maybank is preparing to spin off and list its Etiqa insurance arm on Bursa Malaysia, according to sources with knowledge of the matter. This is not a surprise to us as this was mentioned in press reports previously and highlighted in our report dated Dec 7, 2014.

Maybank’s stake in the insurance and takaful entity Etiqa is parked under its 100%-owned Etiqa International Holdings (EIH), which owns 69% of Maybank Ageas Holdings (MAH), while Ageas (AGS BB, Not Rated), the Brussels-based international insurer, holds the remaining stake. MAH owns the controlling stakes in its insurance and takaful entities.

We assume that the entity to be listed is EIH. As we do not have any financial information on EIH, we estimate that its book value is 69% of the end-2017 book value of MAH, in proportion with its 69% stake. Based on this, we estimate EIH’s book value to be RM3.82 billion, close to the RM3.89 billion quoted in the Edge article.

As for potential valuation, we think the closest proxy to Etiqa is Syarikat Takaful Malaysia Bhd (STMB). At the current price of RM3.40, STMB is trading at a price-to book value (P/BV) of 2.8 times. However, MAH’s return on equity (ROE) of 13.8% in financial year 2017 (FY17) was lower than STMB’s 26.5%. Adjusting for the ROE difference, we think Etiqa could trade at a P/BV of 1.4 times. Based on a P/BV of between 1.4 times and 2.8 times, we estimate Etiqa’s market capitalisation would be between RM5.3 billion and RM10.7 billion.

The Edge Financial Daily article also mentioned that the Etiqa listing may involve the distribution of part of Maybank’s shares in Etiqa to Maybank shareholders. We believe the maximum stake of EIH that Maybank would distribute is 49%, as it would still want to retain its control of EIH. Our base case assumes a distribution of 25% stake (half of the maximum). Based on this, we estimate Maybank shareholders could get nine sen to 17 sen worth of Etiqa shares for (based on book value) each Maybank share held from any distribution of Etiqa shares.

In FY17, the insurance business, which is mostly generated by EIH, contributed about 10% of Maybank’s profit before tax (PBT). As such, every 1% stake in EIH distributed to shareholders could lower Maybank’s PBT by about 0.1%, based on our estimates.

We are positive on the potential Etiqa listing but retain a “hold” call on Maybank as we think this has been priced in, given its high FY19 price earnings (P/E) of 13.5 times (versus historical five-year average of 11.1 times). — CGSCIMB Research, April 19