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”, OP, TP: RM2.10) for 2013. Meanwhile, the money lenders’ balance sheet expansion story remains intact. Both Malaysia Building Society Bhd (“MBSB”, OP, TP: RM3.40) and AEON Credit (“AEONC”, MP, TP: RM17.20), however, need new capital management plans to address their relatively low core capital ratios. We are positive on these plans as additional capital will support higher loans and earnings growth for the companies in the medium-term. Thus far, AEONC’s 4Q13 results came in as expected while MBSB’s 1Q13 results came in above expectations. For insurers, the 1QCY13 results for LPI Capital (“LPI”, OP, TP: RM 16.10) was slightly below expectation while P&O’s results were in line with ours and the consensus estimates.

MBSB - Raising capital soon. MBSB reported a 109.2% YoY increase in its recent earnings results 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. 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). The group’s shareholders fund is expected to increase by RM500m to RM2.0b under such an exercise, which is needed to meet the BASEL III minimum capital requirement.

AEONC - Key beneficiary of responsible lending policy.  Based on its FY13 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 growth 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 prefer to remain conservative in our earnings estimates but believe that there could be upward revisions over the next 12 months if the company performs well.

The key factor to note in LPI’s 1QFY13 results was  its strong gross premium growth. LPI registered a 6% YoY growth in its 1QFY13 gross written premium, underpinned by the fire and marine divisions. This was in line with the industry rate, and we believe that the company will be able to sustain this going forward. On a net premium basis, it fell by -1.4%. We believe the earnings have more room to grow, however, in 2013. Its business cash generation remains the strongest in the sector. This should continue to support a high payout. 

P&O – The Top Pick.  Meanwhile,  P&O performed within expectations in 2QFY13 and showing strong earnings. The surge in net profit 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 insurance contract. 

Post the 49%-stake disposal in POI and special dividend, 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 it 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 management fail to identify any investment targets and decide to return the excess capital to shareholders. The group is also looking to improve its liquidity and marketability of POB shares. We reckon that a share split exercise is highly probable. 

Source: Kenanga