We continue to favour the Non-bank Financial sector and continue to maintain our Overweight rating on the sector as well as our top pick here of Pacific & Orient (“P&O”) for 2013. Meanwhile, the money lenders’ balance sheet expansion story remains intact. Both Malaysia Building Society Bhd (“MBSB”) (OP, TP: RM2.70) and AEON Credit (“AEONC”) (MP, TP: RM13.00), however, need a new capital management plan to address their relatively low core capital ratio. MBSB management has indicated a possible capital raising exercise of c.RM3b-RM4b (to be done in stages), which may involve a rights issue and a dividend reinvestment plan (DRP). On the other hand, AEONC’s management has remained tight lipped over its capital raising plans. We are positive on both companies’ capital raising plans as they would support higher loans and earnings growth for the companies in the medium term. AEONC’s 3Q13 results came in as expected while MBSB’s 4Q12 results came in above expectations.

AEONC - Key beneficiary of responsible lending policy. Based on its 9M13 business volume and growth in fees, we believe that AEONC will still be the key beneficiary of the responsible lending policy. AEONC has further strengthened its presence in the mass consumer credit market through the increase in its branches. As such, the company’s FY13-14E earnings growths are expected to improve further due to the guidelines and as private consumption still remains the main growth driver for the local economy. The company’s personal financing and motorcycle's easy payments scheme are now the main growth drivers as compared to its credit card and motorcycle easy-payments in the past. That said, we are remaining conservative in our earnings estimates but believe that there could be upward revisions over the next 12 months if the company performs well.

MBSB - Raising capital soon. MBSB reported a 37% YoY increase in earnings largely on higher contribution from its Islamic banking operations (mainly government servant loans). While 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 6.3% as at endDecember 2012. Management has indicated a possible capital raising exercise of c.RM3bRM4b (to be done in stages), which may involve a rights issue and a dividend reinvestment plan (DRP). The group’s shareholders fund is expected to increase by RM500m to RM2.0b under such an exercise in order to meet the BASEL III’s minimum capital requirement. Further details on the proposed exercise are expected to be revealed at around March/April 2013.

The 4QCY12 results for both general insurers, LPI Capital (“LPI,” OP, TP: RM 16.10) and Pacific & Orient (“P&O,” OP, TP: RM1.90) were in line with ours and the consensus estimates. The key factor to note in LPI’s FY12 results was its strong gross premium growth. LPI registered a 14% YoY growth in its FY12 gross written premium, underpinned by the fire and marine divisions. This was above the industry’s rate of 8%, which we believe the company will be able to sustain going forward. On a net premium basis, it grew by 11%. Its gross premium portfolio rose beyond RM1.0b and together with the lag between the higher premium growth and profit, we believe its earnings have more room to grow in 2013. Its business cash generation remains the strongest in the sector. This should continue to support a high payout. Similarly, P&O performed broadly within expectations in 1QFY13, which is usually the company’s weakest quarter. YoY, P&O registered a 1.4% growth in its gross written premium to RM122.6m, driven by its motorcycle insurance business.

P&O – The Top Pick. Post the 49%-stake disposal in POI, P&O has recently announced a special dividend of 15 sen/share. On top of this, we believe that the group has the capacity to further return more of its core capital to shareholders. Management has indicated that it would be comfortable with a 170% Internal Core Capital Ratio (ICAR) to comply with the central bank’s Risk-Based Capital Framework vs. the actual 173% ratio recorded as at 31 Dec 2012. The 170% ICAR is a comfortable level to match its premium growth rate of c.5% over the next few years. We have also assumed a conservative dividend payout ratio of 40% but there could be a sweet surprise should the management fail to identify any investment targets and decide to return the excess capital to shareholders. The group is also looking to improve the liquidity and marketability of POB shares. We reckon that that another share split exercise is possible.

Source: Kenanga