AFFIN announced that it has agreed to form a new joint venture with Generali, Italy’s largest insurer, with regards to developing the latter’s general and life insurance businesses. This entails the partial equity disposals of Affin’s life and general insurance units and acquisitions of certain assets and liabilities of MPI Generali Insurans Bhd. Overall, a new enlarged company will be formed with a gross written premium (GWP) value of more than RM2.0b. We make no changes to our assumptions for now. Maintain UNDERPERFORM and TP of RM1.35.

Creating a larger insurance player. Yesterday, AFFIN announced that together with Generali Asia N.V. (Generali), they have agreed to form a joint venture to develop their life and general insurance businesses in Malaysia. In this agreement, AFFIN will dispose 21.0% of equity interest (currently 51%) in AXA Affin Life Insurance Berhad (AALI) and approximately 2.95% of equity interest (currently 49.95%) in AXA Affin General Insurance Berhad (AAGI) to Generali. Additionally, AAGI will acquire certain assets and liabilities of MPI Generali Insurans Berhad via a business transfer to create an enlarged insurance company which also consolidates AALI and AAGI. Ultimately, AFFIN would own 30.0% of the said enlarged company. Currently, no further information of the transaction value of the deal has been disclosed, as the transaction is still subject to regulatory approvals and is earmarked to be completed by 2QFY22.

We are positive with this development, as this agreement would provide the group access to gross written premium of more than RM2.0b (from RM1.38b in FY20) in the general insurance business space. This would firmly catapult the group to be the second largest general insurance player, behind ALLIANZ (with RM2.4b gross written premium). The move could also open opportunities in terms of operational synergies and better offerings to customers which includes a bancassurance partnership with Generali. Additionally, the monetisation of the group’s stake could provide sizeable reserves to support its core banking operations. However, to reemphasise, the transaction value of the agreement has yet to be disclosed and could still be under negotiation. Referencing the respective annual reports, the combined FY20 book value from AAGI and AALI given the disposing stake above is estimated at RM292m. On another note, AAGI reported a FY20 PAT of RM83.8m (+25% YoY), making up 36% of the group’s PATAMI, albeit skewed by heavier loan provisioning in the financing space.

Post-update, we leave our FY21E/FY22E earnings unchanged, as the deal has yet to be finalised.

Maintain UNDERPERFORM and TP of RM1.35. Our TP is based on a FY22E GGM-derived PBV of 0.28x (2SD below 5-year mean). At the moment, we are still cautious on the stock as its high NOII mix could come under threat in the near term from the normalisation of the local trading landscape. In FY20 and 1QFY21, its NOII surged by 25% and 39%, respectively. Meanwhile, although it is not as strongly exposed to financing risks as its peers due to higher composition of NOII, its GIL ratio of more than 3% hovers above the industry average (~2%) and could be a cause of concern especially given the ongoing extensions of movement control orders. In the meantime, ROE and dividend yield leave much to be desired.

Risks to our call include: (i) lower-than-expected margin squeeze, (ii) higher- than-expected loans growth, (iii) better-than-expected improvement in asset quality, (iv) stronger capital market activities, and (v) favourable currency fluctuations.

Source: Kenanga Research - 23 Jun 2021