SINGAPORE (Sept 20): A 30% divestment of Great Eastern Holdings’ Malaysian operations would have minimal impact on Oversea-Chinese Banking Corp, says DBS Group Research in a Wednesday report.
There would however be some value unlocked to GEH’s and OCBC’s shareholders.
According to media reports, Great Eastern is reportedly looking to sell its Malaysian operations.
The insurance arm of OCBC is said to have engaged at least one Malaysian bank to explore selling its stake in its Malaysian operations for as much as US$1 billion ($1.3 billion).
See: Great Eastern may sell Malaysian operations for close to US$1 bil
Several other foreign insurance companies operating in Malaysia -- including Prudential Malaysia and Tokio Marine Insurance Malaysia -- could be exploring similar options.
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Bank Negara Malaysia (BNM) is said to be considering to strictly enforce the 70% foreign ownership cap on insurers, which was issued back in 2009.
“We understand the timeline could be fluid, and negotiations could be managed on a case-by-case basis,” says analyst Lim Sue Lin in the report.
An analysis of annual reports by DBS shows that foreign insurers in Malaysia caught in this current conundrum are AIA, AIG, Chubb, Great Eastern, Tokio Marine, and Zurich Insurance. At the moment, these entities are wholly owned by their respective parent companies.
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Lim says there are three viable options for these companies to pare down their stakes: List 30% of their shares to the public; form a JV with a local partner or divest to local institutional investors.
On average, Great Eastern contributes 15% to OCBC’s pre-tax group earnings. OCBC holds 87.75% of Great Eastern.
At its peak, Great Eastern contributed up to 20% of OCBC’s pre-tax earnings and in challenging periods, the contribution has dropped to below 10%.
Based on Great Eastern Malaysia’s 2016 Annual Report, Lim estimates the Malaysian unit contributed 40% to GEH’s 2016 pre-tax profit, which from OCBC’s standpoint, works out to 6% of its group pre-tax profit.
A sum-of-parts valuation, if it were to include Great Eastern Holdings, would add 20 cents to the current $12.80 target price of OCBC, says Lim.
DBS has a “buy” on OCBC with $12.80 target price or 1.3 times FY18 book value.
As at 12.55pm, shares in OCBC are up 2 cents at $11.02.
