On 26th November, the Minister of Finance of Malaysia has via a letter from Bank Negara Malaysia approved P&O's proposal to dispose its 49% equity interest in Pacific & Orient Insurance ('POI'), a 100%-owned subsidiary of P&O, to Sanlam Emerging Markets Propriety limited. Both parties have subsequently agreed to POI's 49% equity stake valuation at RM270m (2.46x BV) and to the signing of an SPA, which means that the last hurdle has now been cleared. With the total cash proceeds from the potential disposal of RM1.10/share, the fair valuation of P&O should be pegged at RM1.90 (by adding in the fair value from the 51% stake left in POI), implying a strong 50% upside potential from here.

As such, we are reiterating our OUTPERFORM rating on Pacific & Orient with an unchanged target price of RM1.60, valuing the group at an undemanding FY13 EPS of 6.0x. With its existing fundamentals already undervalued by the market, the stock's worth could rise even further on a highly possible capital repayment (or special dividend) post the M&A. LPI Capital meanwhile posted a 17.1% YoY growth rate in its gross written premium to RM767.4m, driven by the fire and marine divisions. A relatively low expense ratio gave a positive impact to the results in 3Q12 as well. The expense-to-revenue ratio was lower at 10%, which was slightly better than management's guidance and our own forecast of 12%. We believe LPI's higher-than-industry organic growth is sustainable and its earnings have more room to grow. Its business cash generation remains the strongest in the sector with an expected RM195m in FY12. Our OUTPERFORM rating is retained on LPI Capital with a TP of RM16.10 based on 15.0x FY13 PER, 2.2x BV and a 7.1% net yield. 

Companies in the money lending sector have generally posted reasonable 3QCY12 results that were within ours as well as the street's expectations. Two companies under our coverage, namely AEON Credit and MBSB, posted encouraging results with high loan growth led by their personal financing segment. Their 4Q12 outlook is positive as these are strong players in their own niche market segments and have been able to capture additional market shares from their competitors. Post their 3Q12 results, our earnings forecasts were relatively unchanged. ACSM (TP: RM9.70) is on a MARKET PERFORM rating as we think we think its current share price could have priced in its strong earnings growth already.  We are, however, maintaining our OUTPERFORM call on MBSB (TP: RM2.70). 

MBSB had an aggressive PF-I promotion campaign in 1H2012 that has enabled the group to capture market share from its peers. The group successfully disbursed RM9.3b of new PF-I loans for the YTD, exceeding management's full-year target of RM8.0b, which has helped its personal financing loans segment grew strongly by +93% YTD that helped to cushion the flat mortgages and corporate loans growth rates of -2.5% and +0.2% respectively. MBSB's balance sheet expansion story remains intact. The group, however, needs a new capital management plan to address its relatively low Core-Capital Ratio of 6.0% as at end-Sep12. We believe the plan could include securitization of loans, issuance of debts  and also possible capital raising exercises. We also reckon that such a plan could be unveiled by management by early 2013.  

Source: Kenanga