Great Eastern Holdings (GEH) G07 could pay up to $280 million for a 70% stake in AmMetLife Insurance Bhd, but the financial impact would be limited, says Citi Research analyst Tan Yong Hong.
This is because Bank Negara Malaysia limits foreign shareholding in local insurance firms to 70%, explains Tan in an Aug 2 note. Meanwhile, GEH’s FY2022 retained earnings stood at $10.1 billion.
AmMetLife is a 50:50 joint venture between AMMB and MetLife International. AMMB is likely to retain 30% ownership as the company similarly pared down its stake in AmGeneral Insurance from 51% to 30% in July 2022, Tan adds.
GEH confirmed in an Aug 1 bourse filing that talks are “currently ongoing” but the process is “at a preliminary stage”. “There is no certainty that any definitive or binding agreement will be entered into pursuant to these discussions.”
This follows Bloomberg’s July 31 story about the ongoing discussions, citing people familiar with the matter.
GEH will report its results for 1HFY2023 ended June before the market opens on Aug 3, while Oversea-Chinese Banking Corporation (OCBC) O39 will release its results before the market opens on Aug 4. OCBC owns a 88.4% stake in GEH.
See also: Great Eastern confirms it is in talks to buy Malaysian insurer AmMetLife
According to AMMB’s annual report for FY2023 ended March, AmMetLife contributed RM76.1 million and RM65.8 million ($22.5 million and $19.5 million) to FY2022 and FY2023 profit after tax.
Tan compares this against GEH’s higher FY2022 profit after tax of $786.9 million.
“Based on these parameters, we believe the financial impact would be limited from GEH’s possible bite-sized acquisition of AmMetLife,” says Tan.
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Why is AMMB paring its stake?
AMMB reduced ownership of AmGeneral (general insurance) from 51% to 30% in July 2022. This move improved capital by 26 basis points (bps) as AMMB continues to build its capital, notes Tan.
AMMB currently holds a 50% stake in AmMetLife and could similarly reduce its stake to 30%. Based on the estimated deal valuation of US$250 million to US$300 million ($335.23 million to $402.28 million), AMMB could receive RM226 million to RM271 million, assuming a stake reduction from 50% to 30%, and lift capital by 20 bps, says Tan.
Insurance contributed just 3% of AMMB’s FY2023 profit, which includes AmMetLife and a 30% stake in the combined entity of AmGeneral and Liberty. Hence, this transaction would strengthen AMMB’s capital position but would have limited earnings impact, writes Tan.
MetLife spun off its retail life and annuity business in 2017, its property and casualty insurance business in 2021, and sold its Hong Kong, Greece and Poland operations within the last two years.
Why is GEH buying?
According to Tan, the proposed acquisition could bring a 4% earnings lift to GEH Malaysia “ex-synergy”.
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AmMetLife’s FY2022 and FY2023 profit after tax was RM76.1 million and RM65.8 million, or 5%-6% of GEH Malaysia’s RM1.2 billion and RM1.27 billion profit in FY2021 and FY2022.
GEH could also be eyeing an enhanced distribution network, says Tan.
According to GEH, it is the largest insurer in Singapore and Malaysia in terms of gross premiums and total assets. Similar to MetLife’s agreement with AMMB in 2013-2014, GEH could similarly get an exclusive agreement to distribute their products through AMMB’s banking network, says Tan.
“Hence, this acquisition could enhance GEH’s distribution channel in Malaysia, and access to AmMetLife’s pool of insurance agents,” Tan adds.
Finally, based on reported transaction value, AmMetLife is valued at 1.6x to 1.9x price-to-book (P/B), based on September 2022 net asset value.
In 2013, AMMB acquired a 30% stake in AMLife and AmTakaful from Friends Life at 1.7x P/B in 2013. In December 2013, MetLife acquired 50% of AmMetLife at 3.3x P/B.
Ahead of DBS and OCBC results
Ahead of DBS’s D05 1HFY2023 results on Aug 3, investors are likely positioning for robust 2QFY2023 results and a possible net interest margin (NIM) upgrade, says Tan.
For OCBC, a lack of clarity on capital management drove de-rating and relative underperformance since 2018, which could reverse if OCBC delivers on its 50% payout policy in 1HFY2023, Tan adds.
This creates a possible setup for Tan’s “pair trade idea”, which favours OCBC over DBS, given relative valuations — DBS at 1.4x P/B and OCBC at 1x.
Tan expects OCBC’s 1HFY2023 results to reinforce OCBC’s 50% payout ratio policy unveiled earlier this year. “We expect at least 40 cents distribution per share (DPS), with upside risk from GEH’s risk-weighted asset optimisation in FY2023, and expect robust 2QFY2023 earnings.”
Hence, Tan is maintaining “neutral” on OCBC with a target price of $12.70, unchanged from his July 19 note, where he increased his target price from $12.50.
On DBS, however, Tan keeps his “sell” call and $27.10 target price, which was increased from $26.60 in his July 19 note.
Shares of all three companies closed lower on Aug 2. Shares in Great Eastern closed 2 cents lower, or 0.11% down, at $18.50; while shares in OCBC closed 13 cents lower, or 0.98% down, at $13.19; and shares in DBS closed 56 cents lower, or 1.63% down, at $33.84 ahead of its results release on Aug 3.
