Insurance arm of MPHB could be worth over RM700m

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THE valuation being looked at for MPHB Capital Bhd’s insurance unit, Multi-Purpose Insurans Bhd (MPIB), is at 2.4 to 2.5 times price-to-book (P/B) ratio, say sources. The deal should be finalised as early as the end of the month, following approval from Bank Negara Malaysia, they add.

According to calculations by The Edge, the transaction value for a 49% stake in MPIB could be RM350 million to RM360 million, based on FY2013 P/B.

MPHB announced last Wednesday that Bank Negara has approved the proposed disposal of its 49% stake in MPIB, but noted that both the company and the intended buyer have to submit new applications to the regulator before exercising the call or put option that is part of the deal.  

Bank Negara’s approval came more than nine months after it first said on Jan 22 that it had no objection in principle to the parties commencing preliminary negotiations on the deal.

Industry players say the valuation of 2.4 to 2.5 times P/B for MPIB is in line with recent transactions.

Last year, Pacific & Orient Bhd sold 49% of Pacific & Orient Insurance Co Bhd to African insurer Sanlam Emerging Markets Proprietary Ltd at 2.45 times P/B. In 2010, Jerneh Asia Bhd and Paramount Corp Bhd sold Jerneh Insurance Bhd at 2.24 times P/B, while in 2011, PacificMas Bhd disposed of its interest in Pacific Insurance Bhd at 1.6 times P/B.   

 Also in 2011, Berjaya Corp Bhd sold a 40% stake in Berjaya Sompo Insurance Bhd to its Japanese stakeholder, which set a new price benchmark for general insurers, at 3.3 times book value.

These deals were done at valuations higher than the transactions for general insurers post-2008 financial crisis, which were between 1.3 and 1.8 times.

On the need for MPHB and the buyer to submit new applications with the central bank, a source says this is to ensure that any future increase in the stake by the buyer is in line with the foreign shareholding rules. MPHB owns 100% of MPIB and it is only selling a 49% stake at the moment.

“At present, it (the maximum allowable foreign shareholding) is 70% ... But, who knows what it will be when and if the foreign buyer wants to increase its stake beyond 49%? The buyer is an Italian insurer and is one of the largest in Europe,” he adds.

Another source says there is a sale-back clause in the deal where the buyer has the option to sell back its stake to MPHB. “If for whatever reason the buyer is not able to up its stake in MPHB when and should it want to, due to regulatory requirements at that point in time, it has the option to review the situation and sell the stake back to MPHB, which has the first right of refusal,” the source adds.

In April 2009, Bank Negara started liberalising the insurance industry to strengthen the resilience and competitiveness of the sector. The move involves raising the foreign equity participation in insurance companies and takaful operators to a limit of 70% from 49%.

Interestingly, a higher foreign equity limit beyond 70% for insurance companies would also be considered, but on a case-by-case basis, for players which can facilitate consolidation and rationalisation of the industry.

“Foreigners do find value in insurance companies in Malaysia. This is because they see the market as yet to be saturated, with growth potential stemming from the country’s growing middle-income group,” an analyst says, adding that Malaysian insurers also offer foreign players a toehold in Asean.  

MPHB’s insurance business contributed 87.72% and 73.26% of the total revenue and operating profit of the group in FY2013. MPIB posted revenue and operating profit of RM215.77 million and RM44.92 million respectively in 2013, translating into an operating margin of 20.9%.

After the sale of a 49% stake in MPIB, MPHB could see its earnings drop substantially. However, analysts are not perturbed by this as they say the management is aware of this and has future plans for the group.

“The decline in earnings is not relevant to the grand scheme of things going forward. MPHB has other assets, and with the amount of land it owns, the group could venture into property development,” says an analyst.

Based on its FY2013 report, MPHB has landbank totalling 2,495.93 acres, of which 675.41 acres are in Rawang, Setapak, Section 67, Kuala Lumpur and Penang. The list also includes a parcel of agricultural land in Pengerang, Johor, measuring 1,803.2 acres.

MPHB was listed last year after a corporate exercise undertaken by Multi-Purpose Holdings Bhd to demerge the group’s financial services and other investments from the core gaming operations. The gaming business is retained by Multi-Purpose, which has since been renamed Magnum Bhd to reflect its focus on gaming.

While MPHB has yet to indicate how it intends to use the sale proceeds, sources say it is likely to make fresh investments and/or pay out part of the receipt as dividends, should Bank Negara allow it.

It should be noted that since MPHB owns 100% of MPIB, it is deemed a financial holding company and is under the purview of the central bank. Earlier, MPHB had proposed to pay out a dividend of five sen per share for its financial year ended Dec 31, 2012, but this did not materialise as it failed to get Bank Negara’s approval. MPHB did not state the reason.  

As at June 30, MPHB stood at a net cash position of RM331.4 million, after deducting total borrowings of RM83.24 million.

In a research note on Nov 6, UOB Kay Hian Research says in addition to synergetic benefits that are expected to arise from having a foreign partner, the disposal of MPIB will provide MPHB an opportunity to use the proceeds for value-accretive property development activities and capital management over the intermediate term.

The research house has raised its target price for the stock to RM2.80 from RM2.69 on Aug 11.

“Our higher target price is due to the inclusion of the recently acquired Jalan Imbi land (RM143 million, representing RM2,000 psf) and the adjustment of net cash position in our SOTP (sum of the part valuation),” it said on Aug 11, adding that it believes MPHB will be able to deliver more upside in the longer term, particularly in 2015 when more catalysts emerge.

MPHB closed at RM2.42 last Friday, giving it a market capitalisation of RM1.72 billion.

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This article first appeared in The Edge Malaysia Weekly, on November 10 - 16, 2014.