Friday, May 27, 2011

Allianz ... May11

TA Security Research:-

1. 1Q2011 Result Highlights/ Review

1Q FY11 results came within expectations. Allianz reported stronger net profit of RM33.7mn vs. RM23.2mn a year ago. This accounted for 23.7% and 25.4% of ours’ and consensus’ full year net profit estimates of RM142.0mn and RM138.5mn respectively.

The stronger YoY performance was underpinned by higher gross earned premiums (+2.6% YoY or RM15.2mn) and investment income (+28.8% YoY or RM11.9mn). The increase was however, muted by a 34.1% YoY decline in fee and commission income coupled with a 21.1% YoY jump in net benefits and claims and higher taxes. The tax rate increased to 36.3% from 35.2% in 1Q FY10.

By segment, the general business saw a 40.3% jump in segment profit despite the slight 2.4% decline in operating revenue. This was due to an increase in underwriting profit from this segment. Meanwhile, profit from Life business grew at a robust pace of 83.5% YoY – driven by a 13% YoY jump in operating revenue.

1Q is traditionally weaker vis-à-vis the previous quarter. For Allianz, 1Q FY11 net profit slipped by
close to 20% QoQ from RM41.8mn in 4Q FY10. The decline was mostly attributed to the transfer of
surplus of RM15.0mn from the Life fund to the Shareholders’ fund in 4Q. Note that this is performed
on a yearly basis before the end of the FY. Elsewhere, operating revenue fell by 1.6% to RM653.4mn (from
RM663.8mn in 4Q FY10) on the back of lower gross earned premiums from the life insurance business.

2. Impact
No change to our earnings estimates.

3. Outlook
We expect the strong earnings momentum to continue this year. We are forecasting net profit growth of 9.9%
and 11.2% for FY11 and FY12. This is on the back of a 12.2% and 12.3% jump in net earned premiums,
conservative 5% growth in other revenues (comprising investment income, realized gains and losses, fair value gains and losses, fee and commission income and other operating income). Although we also forecast net claim and other expenses to increase in tandem with higher sales, we are projecting lower claims ratio due to the improved macro climate.

We note that our projections are in line with management’s 10% growth guidance for 2011. Key growth areas include: 1) underwriting several construction related risks for projects under the ETP, and 2) the motor insurance segment. Here, management sees car sales to remain buoyant. MAA is projecting TIV of 618k units in 2011 vs. 605k in 2010. We note that motor insurance account for 48% of Allianz’s general insurance premiums.

We also foresee BNM’s new motor cover framework to be accretive to Allianz’s earnings given that the motor business accounts for close to half of the non-life total gross written premiums. However, we believe the new directive to charge owners of private vehicles that are more than 10 years old normal market premium rates for their motor insurance vs. 200% and 300% above the normal rates previously could be a dampener although we do not foresee the impact to be significant.

In Dec 2010, Allianz announced that BNM had granted approval to them to commence negotiation with MNRB Holdings Bhd to acquire an equity interest in Takaful Ikhlas Sdn Bhd. There are no new updates on this development at this juncture. We believe a Takaful license would bode well for the group’s future earnings.

4. Valuation and recommendation
We fairly value Allianz at RM5.80 (based on a 30% discount to industry’s target PER of 9x on FY11 EPS of
RM0.92/share). We believe the discount is justified due to the stock’s tight liquidity and smaller market cap compared to larger players such as LPI Cap, Manulife and Pacificmas. Buy maintained.

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