Investment Highlights

• We maintain our BUY call on RHB Bank with an unchanged fair value of RM6.60/share based on an FY20 P/BV of 1.0x supported by an ROE of 9.9%. Our earnings forecast is unchanged until further developments emerge on the group’s plans to sell its shares in RHB Insurance.

• RHB Bank will be commencing negotiations with Tokio Marine Asia Pte Ltd (Tokio Marine) to dispose of up to 94.7% stake in RHB Insurance to the latter. This is not surprising as news has surfaced in early July on the group’s plans to dispose of its stake in the general insurance business. RHB holds 94.7% shareholdings in RHB Insurance.

• The discussion between the two parties is valid for 6 months until the end of January 2020 based on the approval by Bank Negara. No further details have been disclosed at this moment as the negotiation is still in its infancy.

• In FY18, RHB Insurance achieved a growth in gross earned premium of 12.3% YoY. It recorded a claims ratio of 59.7% for FY18, which is close to the industry’s 58.2%. The combined ratio of RHB Insurance of 91.6% in FY18 was on par with the sector’s. It has a low commission ratio of 10.0% while its management expense ratio stood at 21.9%.

• RHB Insurance recorded a PBT and PAT of RM80.1mil and RM68.2mil respectively as at the end of FY18. Its PBT accounted for only 2.6% of the group’s FY18 PBT of RM3.1bil — small in earnings contribution).

• We are positive on the potential disposal of its stake in RHB Insurance as it will unlock the value of the insurance business and be accretive to the group’s capital ratios. The group and bank entity CET1 ratios were 15.7% and 13.6% respectively in 1QFY19.

• The average PB for recent M&As for general insurance companies is 1.8x. P/BV for the transactions range from 1.2x to as high of 3.3x as seen in Exhibit 1.

• As at the end of FY18, RHB Insurance has shareholders’ funds of RM573.7mil translating into a book value per share of RM5.73. Assuming a P/BV of 1.8x, the disposal consideration of the 94.7% stake in RHB Insurance could be valued at RM977.9mil

Source: AmInvest Research - 1 Aug 2019