Possible AmGeneral sale likely to shore up AMMB’s capital

This article first appeared in The Edge Financial Daily, on December 10, 2018.
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AMMB Holdings Bhd
(Dec 7, RM4.40)
Maintain buy with an unchanged target price (TP) of RM4.80:
AMMB Holdings Bhd could be looking to sell AmGeneral Insurance Bhd is not a surprise, while the speculated price of RM3.36 billion translates into a historical price-to-book value (P/BV) of 1.8 times. Valuations seem low, but justifiable given a more challenging operating environment under a detariffication. If it materialises, we think the proceeds could go to shoring up an already adequate capital or a higher dividend payout. The impact on earnings would be manageable. We maintained a “buy” call with an unchanged TP of RM4.80 — 2019 estimate P/BV of 0.8 times.

According to press reports, Allianz Malaysia Bhd (with a “buy” call; TP: RM16.70) and Mitsui Sumitomo Insurance Co have been shortlisted to buy AmGeneral, a 51% subsidiary of AMMB. Take note that Mitsui Sumitomo Insurance holds a 70% stake in MSIG Insurance, and Hong Leong Financial Group (with a “buy” call; TP: RM21.20) the remaining 30%. By gross earned premiums, Allianz General, AmGeneral and MSIG are the three largest general insurers in the country.

The reported price of US$800 million (RM3.36 billion) would value AmGeneral at a historical P/BV of 1.8 times. Take note that in 2012, AMMB and Insurance Australia Group Ltd jointly bought their combined 100% stake in Kurnia Insurans (Malaysia) Bhd at a P/BV of two times. In our view, a P/BV of 1.8 times for the second-largest general insurer in Malaysia would be relatively low by historical comparison but justifiable since the operating environment has become increasingly challenging, with auto and fire tariffs under pressure from detariffication.

If it materialises, AMMB could receive RM1.71 billion for its 51% stake (at 57 sen per share). If it decides to shore up capital, we estimate an enhancement in AMMB’s end-Sept 2018 common equity tier one ratio to 12.5% from 11.7%. However, the current capital ratios are comfortable and we would not rule out the possibility of a special dividend payout. AmGeneral contributed 11% of AMMB group’s net profit in the financial year ended March 2018. Assuming the proceeds are reinvested at a 4% per annum return, we estimate a manageable -5% impact on financial year 2020 estimate earnings. — Maybank IB Research, Dec 5