Affin looks to form a new joint venture with Generali and create the 2nd largest general insurer in Malaysia, along with paring down interest in its loss-making life insurance unit. Upon completion, Affin will hold 30% stake in both entities. Overall, we view it as a positive development despite earlier hoping to see a full exit from both its insurance businesses. No pricing details were disclosed but we believe P/B valuations should be >1x. Besides, we reckon disposal proceeds will likely be ploughed back to its core banking business. In our opinion, Affin’s risk-reward profile is still favourable. Retain BUY and GGM-TP of RM2.15, based on 0.43x FY22 P/B.

NEWSBREAK

Affin looks to form a new joint venture with Generali, which would include the former’s general (AAGI, 49.95%-owned) & life insurance (AALI, 51%-owned) businesses along with the latter’s general insurance unit in Malaysia. As such, Affin intends to dispose 2.95% equity interest in AAGI and 21% in AALI to Generali. Subsequently, Affin will then acquire certain of Generali’s general insurance assets and liabilities in Malaysia, which will be funded through the issuance of new AAGI shares. Once these exercises are completed, Affin will only hold 30% equity interest each in AAGI and AALI.

HLIB’s VIEW

Still a positive outcome. While we were hoping to see a full exit from its insurance businesses, this move nonetheless, is still a positive development, in our view. Firstly, the enlarged general insurance company is poised to become Malaysia’s 2nd largest provider in this space. Essentially, we welcome market consolidation as it will lead to better pricing power and healthier competition in a highly fragmented sector. Also, we believe there are the usual cost synergies to be extracted (standalone AAGI only generates 5-6% ROE vs Generali Malaysia’s 8-12%). Secondly, AALI is not profitable and thus, we feel that paring down its equity interest is a good decision.

No pricing details but should be >1x P/B. Although we do not have pricing details of the disposals, assuming a price-tag of 1x book, we estimate Affin stands to pocket c.RM113m of cash or RM0.06/share (AAGI: RM39m; AALI: RM74m). That said, both will likely fetch higher valuations, since the average M&A P/B for general insurers is 1.9x while for life insurers is 1.4x. Also, we note that Bloomberg has earlier reported a higher P/B price-tag of 1.6x and 1.9x for AAGI and AALI, respectively.

Likely to plough back proceeds to core banking business. Considering Affin did not fully exit from its insurance businesses, we now reckon the possibility of dishing out special dividends is slim. That said, ploughing back the disposal proceeds to drive its core banking business is not necessary a bad move as the state of the economy will only get better in time when Covid-19 woes fizzle out in late 2021.

Forecast. Unchanged.

Retain BUY and GGM-TP of RM2.15, based on 0.43x FY22 P/B with assumptions of 4.4% ROE, 6.3% COE, and 3.0% LTG. This is in line to its 5-year average of 0.46x but below the sector’s 0.91x; the discount is fair given its weak ROE output, which is 5ppt beneath industry mean. Despite not fully exiting from its insurance businesses & the possibility of dishing out special dividends is now slim, Affin’s risk-reward profile remains favourable, in our view. We still believe there is a strong likelihood of value unlocking exercise for Affin Hwang Asset Management in the short -term. Also, current price point is attractive (0.35x P/B at -1.0SD).

Source: Hong Leong Investment Bank Research - 23 Jun 2021