Period     2Q13/6M13

Actual vs. Expectations    We consider the reported 1H13 PAT of RM22.4m was within our forecast (61%), based on management’s guidance that strong 2Q is driven by provisioning write back.

Dividends    The group has proposed a special dividend of dividend of 15.17 sen less 25% income tax and tax exempt dividend of 3.82 sen with ex-date fall on 5^th June 2013.

Key Results Highlights   On a QoQ basis, the group’s 2QFY13 PAT was up by 65.3% to RM14.0m. The increase was mainly driven by a write back of allowance for impairment of insurance receivables for the current quarter compared to a oneoff impairment loss arising from the commutation of a reinsurance contract.

YoY,  P&O registered a -1.3% YoY growth rate in its gross written premium to RM159.5m, driven by motorcycle insurance. The flat revenue growth was within our expectation as P&O already have a dominant market share in the motorcycle insurance business. Besides, the flattish revenue growth was also inline with management’s guidance.

Outlook    Management indicated that it would be comfortable with a 170% Internal Core Capital Ratio (ICAR) to comply with BNM’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 in the mid-single digit over the next few years. Our dividend forecast assumed a conservative payout ratio of 40%, but there could be an upside risk to our dividend forecast should management fail to identify any investment targets and decide to return the excess capital to shareholders.  Capital management will be the next price catalyst for the stock in our view.

Meanwhile, the group is looking for proposals to improve the liquidity and marketability of POB shares. We do not rule out a potential share split exercise for this purpose.  

Change to Forecasts     With the divestment of 49% stake in P&O Insurance, which was completed on 17th May 2013, we believe 2H13 earnings contribution will be lowered, hence no changes to our forecasts.

Rating  Maintain OUTPERFORM 

The stock now offers a higher >27% total return (22% capital gain and 4.5% dividend yield). We are thus maintaining our OUTPERFORM rating for now.  

Valuation     In line with the recent general insurance sector rally, our target price has been raised to RM2.10 from RM1.80 as we targeted higher 1.2x P/Bv (previously 1.0xBv) based on FY14’s Bv of RM1.77 and see a sustainable ROE for the group at 12%, post divestment.  P&O’s current valuations of a PER of 8.6x and a P/BV of 1.0x supported by its high dividend yield of 4.5%.

Risks    Unexpected MMIP losses could erode its earnings.

Source: Kenanga