Journey to Wealth

Pacific & Orient - 3Q12 earnings brings a turnaround

kiasutrader
Publish date: Thu, 30 Aug 2012, 10:14 AM

Period    3Q12/9M12

Actual vs. Expectations
 The 9M12 PAT of RM16.5m was within our expectation (49%) and the management's guidance. We believe management will be able to achieve at least RM15m PAT in the 4Q to reach our full year estimate of RM33.6m.

Dividends   No dividend was declared.  

Key Results Highlights
 On a QoQ basis,  the group's 3QFY12 PAT was up significantly to RM14.4m. The increase was mainly driven by the normalisation of few one-off items vs. 2Q, which saw RM20.8m impairment loss arising from the commutation of a reinsurance contract and the increase in share losses of RM7.3m incurred by MMIP.  

 YTD,  P&O registered a 4.6% YoY growth rate in the gross written premium to RM413.0m, driven by the motor cycle insurance. The mid-single digit revenue growth was within our expectation as well as the management's guidance as P&O already have a dominant market share in the motorcycle insurance business.

 Overall, we think this is a good set of results and is on track to achieve our RM33.6m net profit forecast. 

Outlook   We believe that M&A activities would act as rerating catalysts for P&O's share price. The media had reported that South African's largest financial services provider, Sanlam, is eyeing a substantial stake of up to 49% in Pacific and Orient Insurance ('POI'), a 100%-owned subsidiary of P&O. Further developments from here could drive up P&O's valuation over the next 6-12 months based on the recent acquisition valuation parameters of M&A transactions, in our view.
 
Change to Forecasts
 No changes in our forecasts.

Rating  Maintain OUTPERFORM 

 P&O is trading at just 4.6x its core FY13 earnings and at just 1.1x its FY13 book value. There could be upside to our profit forecasts as Hanover RE could potentially return its excess profits to P&O starting from 2013 as part of its previous quota share arrangement.

Valuation    Maintain our Target Price of RM1.60, valuing the group at an undemanding FY13 EPS of 6.0x.  

Risks   Unexpected MMIP losses could erode earnings.

Source: Kenanga 
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