AMMB ... May12

Alliance Research ...

An insurance giant in the making
AMMB announced yesterday that AmG has entered into a conditional sale and purchase agreement for the proposed acquisition of a 100% equity interest in Kurnia Insurans (Malaysia) Berhad (KIMB) for RM1.55bn. Although the proposed acquisition of KIMB is expected to be earnings accretive for AMMB over the long term, near term earnings accretion will be minimal. Therefore, we believe that market will not be overly excited on the deal. We maintain that the near term key re-rating catalyst for the group remains ANZ potentially increasing its stake in AMMB. Maintain BUY with target price of RM7.40.

Proposed acquisition of Kurnia Insurans…
 AMMB Holdings Berhad (AMMB) has announced yesterday that AmG Insurance Berhad (AmG), a 51.0%-owned subsidiary of AMMB, has entered into a conditional sale and purchase agreement with Kurnia Asia Berhad (KAB) for the proposed acquisition of 100% equity interest in Kurnia Insurans (Malaysia) Berhad (KIMB).

 We wish to highlight that the acquisitions only comprise of KAB’s domestic insurance operations. Insurance businesses in Thailand and Indonesia will be retained by KAB, although KAB will cease to use the ‘Kurnia’ brand name outside of Malaysia. The transaction structure is illustrated in Figure 5.

 The total cash consideration for this proposed acquisition is RM1.55bn. This will be funded by AmG entirely with capital funds to be injected proportionally by its respective shareholders (51.0% by AMMB and 49.0% by Insurance Australia Group Limited (IAG)).

 Management of AMMB indicated that proposed acquisition will be financed through internal funding and potentially borrowing. Management does not foresee the need to fund the transaction via equity issuance.

 The transaction is subjected to the approval of the shareholders of KAB and is expected to be completed by 3QCY12.

… domestic insurance giant in the making!
 On a combined basis, the acquisition will transform the enlarged AmG from its current eighth position in the domestic general insurance market (with about 5% market share) to be the largest general insurer in Malaysia (about 13% market share). The pooled gross write premium amounted to over RM1.7bn.

 Besides that, the acquisition will strengthen AmG’s dominance in the motor insurance business with the highest combined market share of 22% (from AmG’s current market share of around 8%). The market position of the combined entity is illustrated in Figures 6 and 7.

Acceleration in non-interest income and expected synergistic benefits
 The acquisition is also expected to accelerate the contribution of non-interest income to the banking group’s total income. This transaction illustrates management’s undivided commitment to grow its non-interest income stream. We understand that the contribution of non-interest income to total income is expected to increase to more than 40% over the next three to five years, compared to around 30% presently.

 Besides that, we are positive that the integration of KIMB will enhance AmG’s brand position and provide enlarged platform and customer base for AMMB to cross sell its product offerings.

 Management also expects cost synergies to be extracted from this potential integration, although they could not provide further quantitative guidance for now.


Pricing reasonable, near term EPS effect neutral, no impact to capital ratio
 The price tag of RM1.55bn values KIMB at a 2.0x P/BV based on its net assets of RM756.5m as at 30 June 2011. Although we do not view it as a bargained acquisition, we believe that the pricing is reasonable given that KIMB is a dominant player in the domestic general insurance market and the largest motor insurer in Malaysia.

 We understand that the proposed acquisition will not have a material impact AMMB’s core capital ratio.

 Management guided that the near term impact to the group’s earnings to be neutral or insignificant, although they foresee that the proposed acquisition to be EPS positive within two years of integration. Management will provide further financial details on the expected earnings contributions from this proposed acquisition going forward. For FY11. KAB reported net earnings of RM87.0m, mainly contributed by KIMB. This represents just under 3% of our FY12 earnings estimates for AMMB.
Impact on earnings

 We do not expect the proposed acquisition to have a significant impact to our earnings estimate. As such, we are maintaining our earnings forecast.

Emergence of M&A news flow to attract buying interests, maintain BUY
 Although the proposed acquisition of KIMB is expected to be earnings accretive for AMMB going forward, we believe that market will not be overly excited on the deal.

 We maintain that the near term key re-rating catalyst for the group remains ANZ potentially increasing its stake in AMMB. With the recent acceleration of M&A news flow in the banking sector, we observe an emergence of buying interests on the stock.

 We believe that the potential for ANZ to increase its stake in AMMB is imminent, in view of further liberalisation in the domestic banking sector by BNM in Dec last year with the unveiling of Financial Sector Blue Print.

 We maintain our BUY recommendation on AMMB with a target price of RM7.40 derived through Gordon Growth Model (implied 1.6x FY13 P/B, 15.0% ROE).

 Key re-rating catalysts include (1) M&A activities, (2) stronger loans growth, and (3) stronger than expected non-interest income.

 Key downside risks to our recommendation include (1) lower than expected loans growth, (2) NIM compression due to competition, and (3) deterioration in asset quality.