Last week CIMB explained that the tie-up with Japan’s SOMPO Holdings is expected to bring in an additional RM1b to its topline in the next 5 years. We are not overly excited in the short-term news as we believe FY17 earnings will be enhanced by 1% to 3%. However, we are positive in the long-term as we believe CIMB can tap into the growing middle class in ASEAN with its extensive presence in the region. We thus raised our TP to RM4.87 and upgrade to OUTPERFORM call due to its compelling valuation.

SOMPO Deal to bring in RM1b to the topline. Last week in an interview, CIMB Group Chief Executive Tengku Zafrul explained that the 15-year tie-up with Sompo Japan Nipponkoa Holdings Inc is expected to enhance its topline revenue by an additional RM1b in the next five years starting from financial year ending 31 Dec 2017. The tie-up, which is a profit-sharing deal and was sealed early this month, is expected to reap benefits from SOMPO’s capabilities in digital technology in driving growth in the bancassurance segment. SOMPO is one of the top 3 Japanese insurers and currently operates in six countries through local subsidiaries and has representative offices in two countries in the ASEAN region. SOMPO has successfully achieved a 38% increase in its Gross Written Premium during the last two years, which is more than two times higher than the market growth during the comparable period. CIMB will sell and distribute SOMPO’s life-insurance products across the markets in the region namely Malaysia, Indonesia, Thailand and Singapore boosted by CIMB’s 1,000 retail branches across the region.

The first in the region. Tengku Zafrul also added that CIMB is the first bank in the region to sell non-life insurance products in four countries concurrently and has started selling in Singapore followed by Indonesia at the end of the year. Sales in Thailand will commence in 2018. Currently in Malaysia, SOMPO products are sold by Allianz Malaysia that will expire in 2017 after which CIMB will start distributing SOMPO’s products.

Earnings to likely be enhanced by 1-3% for FY17%. We are not overly excited in the short-term as we reckon that the additional revenue will only account for less than 1% in our forecast FY17’s revenue. While details are still sketchy at this juncture, we believe FY17 earnings will be enhanced by 1.5% to 3% (assuming that FY17’s Non-interest income revenue is enhanced by an additional RM100-200m from the sale of SOMPO’s products). However, we are positive in the long term as we see the growing prospect of added revenue stream coming in as CIMB can tap into the large ASEAN consumer market with its extensive retail branches. Bear in mind too that the insurance sector is gaining momentum with the emerging middle class (especially in Indonesia) are increasingly buying insurance. The ASEAN non-life insurance market is expected to grow at a CAGR of approximately 7% over the next ten years to reach a total market size of USD50bn by 2025.

TP and rating raised. Based on a conservative estimation of an additional RM100m to its topline, we raised our TP to RM4.87 (from RM4.71 previously). This based on a 0.9x FY17E P/B where we utilised: (i) COE of 8.8%, (ii) FY17 ROE of 8.2%, and (iii) terminal growth of 2.5%. Previously, we applied a 0.9x FY17E P/B where we utilised: (i) COE of 8.8%, (ii) FY17E ROE of 8.1%, and (iii) terminal growth of 2.5%. We see value in the stock as its currently trading at 0.9x P/BV compared to the industry’s current trading of 1.5x P/B and nearly reaching its lowest point in its 10-year history; hence, we believe that the stock price has bottomed out. We thus upgrade it to OUTPERFORM.

Source: Kenanga Research - 27 Jun 2016