News

To sell its entire 30% interest in AIA AFG Takaful (which is involved in family Takaful business) to American International Assurance (AIA) for RM45m cash. Financial impact

Based on AFG’s 9MFY03/13 accounts, book cost (or investment in associate – note that AIA AFG Tafakul is the only associate of the company) was RM22.6m (versus RM30m original cost due to accumulated losses). Thus, the sale will result in circa RM22m one-off profit to the group or circa 1 sen boost to book value.

During the 9MFY03/13, its share of associate reported a RM3.9m loss. We believe the loss was due to the initial gestation period (normally circa 5 years for Islamic life insurance business) as the company only started slightly more than a year ago. Elimination of associate loss and additional interest income will add circa 1.2% to the group’s net profit, immaterial.

Pros / Cons

We believe the sale was due to the long gestation period and losses arising from the venture.

We also suspect that this sale together with the proposed disposal of 70% in Alliance Investment Management (a fund management company) could be prelude to DBS entry as a major shareholder (note that the approval to commence discussion for DBS to acquire Vertical Theme’s 29% stake in AFG was announced back in Apr 12).

This is because due to lack of scale, it is difficult for AFG to compete in the fund management and Takaful spaces in view of the intense competition from much larger peers.

Regardless of the outcome of potential change in major shareholder, we still view the disposal positively.

Risks

Unexpected jump in impaired loans and lower than expected loan growth. Intense competition from much bigger players.

Forecasts

No changes.

Rating

BUY

• Positives – strong asset quality and deposit franchise, new management and new strategy showing results, potential write-back from CLO provisions, potential M&A excitement and ample room for more active capital management.
• Negatives - Stiff competition from significantly larger players with bigger scale and reach and loans growth among the slowest (but has since caught up with industry).

Valuation

• Target price maintained at RM4.60 based on Gordon Growth with ROE of 13.9% and WACC of 10.4%.

Source: Hong Leong Investment Bank Research - 12 Mar 2013