AmG Insurance Bhd (AmG), a 51%-owned general insurancesubsidiary of AMMB Holdings Bhd (AMMB) said it had on 4 April 2012, receivedBank Negara Malaysia's (BNM) notification (dated 3 April 2012) that theMinister of Finance had granted approval to it pursuant to section 67 of theInsurance Act 1996 for it to commence talks to acquire the 100% equity interestheld by Kurnia Asia Bhd (KAB) in Kurnia Insurans (Malaysia) Bhd (the Proposal).We are mildly positive on the move although there are no details available at thisjuncture. We continue to maintain our OUTPERFORM rating on AMMB with an unchangedtarget price of RM6.70 (based on 1.6x its FY13 BV of RM4.16). 

To acquire KurniaInsurance?  No details are availableon the Proposal until probably the signing of a definitive agreement betweenAmG and KAB later if talks are successful.  We are mildly positive on the move. The acquisition makes strategic sense with a market share enhancementand AmG will become a dominant player in the motor and general insurancebusiness post acquisition.

Potential acquisitionprice? At this juncture, the group has not revealed any details on thispotential acquisition. However, KAB is now trading at 2.24x BV with a marketcap of RM900m and at the higher end of recent transacted acquisition multiple rangeof 1.4x-3.4x BV.  

Financial impacts.Based on FY12/13 consensus PAT estimate of RM69m, and assuming total investmentcost of RM900m with a 75% debt financing structure at a financing rate of 4%,our calculation shows that this acquisition will only enhance AMMB's FY13earnings by 1% (see figure 1). Hence, we believe the deal will have a neutralimpact to AMMB's profit. However, we do not rule out the possibility of capitalinjection post acquisition. Recall that Zurich Financial injected a further RM516minto MAA's business in order to bring its capital level up to the regulatoryrequirements after it bought over MAA for RM344m in September 2011.

Valuation unchanged.  Given that  the  proposal is  still  in  theprogress of negotiation and our mildly positive view on the move above toacquire Kurnia Insurance, we continue to maintain our OUTPERFORM rating on AMMBwith an unchanged target price of RM6.70 based on 1.6x FY13 BV of RM4.16.