No special Affin dividend forecast after Generali agreement



The formation of Malaysia’s second-largest general insurer led by Generali Asia would lead to better pricing power and healthier competition in a highly fragmented industry, and is financially positive for Affin Bank Bhd.

Hong Leong Investment Bank Bhd (HLIB) analyst Chan Jit Hoong expects potential new joint venture (JV) between Affin Bank and Assicurazioni Generali SpA, or Generali Group of Italy, to create second largest insurer general of Malaysia to enhance the value.

“We believe there are the usual cost synergies to extract, namely 5% to 6% return on equity versus 8% to 12% for Generali.

“AXA Affin Life Insurance Bhd (AALI) is not profitable and therefore we believe reducing its equity stake is a good decision,” Chan said in a research report yesterday.

He said the move was positive for Affin despite previous hopes of seeing a full exit from AXA Affin General Insurance Bhd (AAGI) and AALI.

“In our opinion, Affin’s risk / reward profile continues to be favorable,” he said.

The formation of the new joint venture with Generali would include the general insurance business of Affin AAGI (49.95% owned) and AALI life insurance (51% owned) as well as the general insurance business of Generali in Malaysia.

Subsequently, Affin will acquire certain general insurance assets and liabilities of Generali in Malaysia, funded by the issuance of new AAGI shares, thereby enabling Affin to hold a 30% stake in AAGI and AALI.

There are no details on the prices of the disposals, but Affin is expected to pocket RM 113 million in six sen cash per share, assuming a price equal to that of a book.

“That said, both will likely have higher valuations, as the average price to book (P / B) ratio of mergers and acquisitions for general insurers is 1.9 times, while for life insurers is 1. , 4 times, “he noted.

HLIB expects that the proceeds from the divestiture will likely be reinvested in Affin’s core banking operations.

Chan also noted that Bloomberg reported a 1.6x and 1.9x higher P / N ratio price for AAGI and AALI respectively.

He added that since Affin has not completely withdrawn from the insurance business, the possibility of paying special dividends is very slim.

“Recovering the proceeds of the divestiture to boost its core banking activities is not necessarily a bad decision as the state of the economy will only improve over time when the woes of Covid-19 end. 2021, “he said.

With the bank’s profit forecast unchanged, Chan retained the “Buy” rating and target price (TP) of RM 2.15 for Affin.

“We still believe that there is a high likelihood of a value unlocking exercise for Affin Hwang Asset Management Bhd in the near term,” he said.

He said the current price is still seen as attractive.

CGS-CIMB Securities Sdn Bhd analyst Winson Ng agreed with Chan that the joint venture agreement would add value to Affin.

Ng said the deal would result in an estimated one-time gain of RM 157.2 million, which is 32% of the fiscal year 2022 (FY22F) net profit forecast and higher contributions to the profits of its business units. insurance.

“The deal did not surprise us as Affin explored various options to improve its capital ratios, which would be achieved by reducing its stakes in insurance entities.

“We are positive on the proposed deal as we expect it to result in one-time gains and higher contributions to the revenues of its insurance units,” he said in a report yesterday.

Despite the positive opinions, the brokerage reiterated its call to “Reduce” to Affin due to the increased credit risks associated with Covid-19, and maintained its earnings per share FY21F-FY23F and its TP based on the model of discounted dividends of RM 1.30.

“We see higher credit risks for the bank compared to its peers on its high ratio of gross impaired loans (GIL) of 3.41% at the end of March 2021 against 1.58% for the sector.

“A potential downgrade catalyst is a larger increase in the GIL ratio relative to other banks in 2021,” he said.

Affin shares ended up 1.74% at RM 1.75 yesterday, valuing the company RM 3.72 billion.

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