SINGAPORE (Mar 8): UOB Kay Hian is reiterating its "buy" on Oversea-Chinese Banking Corp with higher target of $14.95 if the bank decides to divest a 30% stake in Great Eastern Life Assurance (Malaysia) (GELM) either through an IPO or trade sale.
UOB says IPO for GELM is a key catalyst for the bank. OCBC Bank's 87.8%-owned Great Eastern Holdings (GEH) has to reduce its stake in GELM from 100% to 70% to comply with limit on foreign ownership for insurers operating in Malaysia.
Management could divest the 30% stake in GELM either through an IPO or trade sales, says UOB. Either way, GEH has to submit its plan to Bank Negara by Jun 18 and execute the plan likely in 2H18.
In a Thursday report, analyst Jonathan Koh says GELM is an "amazing" life insurance franchise. In Malaysia, GELM is the second largest player for conventional life insurance with estimated market share of 23%.
"Financial performance is also impressive with GELM achieving ROE of 41-47% over the past five years," says Koh.
GEH’s Malaysia operations also deliver superior new business enterprise value (NBEV) margin. GEH’s Malaysia operations registered total weighted new sales (TWNS) of $362.1 million in 2017, which accounted for 27.4% of GEH’s total TWNS. Agency channel contributed 90% of total TWNS. It has successfully recruited 5,200 new representatives during the year.
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"Malaysia accounted for 27.3% of GEH’s profit from insurance business and 29.8% of GEH’s net profit in 2017," says Koh, "It also accounted for 20.8% of GEH’s embedded value."
UOB expects OCBC Bank to recognise divestment gain of $608 million for vendor sale of its 30% stake in GELM during the impending IPO in 4Q18.
Koh expects OCBC to hike final dividend for 2018 to 22 cents based on payout ratio of 45% but he expects any special dividend to be modest in size given the need to retain and re-invest to support future growth.
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"We estimate fully-loaded CET-1 CAR post-IPO of GELM at 12.9%, which would be in line with its peers’," says Koh.
On a group-wide basis, GEH achieved healthy new business embedded value (NBEV) margin of 41.5% and NBEV expanded 16.8% in 2017. For Malaysia operations, NBEV grew 37% and accounted 39.2% of GEH’s total NBEV. Malaysia delivers higher NBEV margin of 59.4% compared with 34.8% for Singapore.
"We value GELM at 6.0 times book value based on Gordon Growth Model. The 30% stake in GELM is worth $760 million if we apply a discount of 20% for the IPO," says Koh.
As at 4.35pm, shares in OCBC Bank are up 9 cents to $13.30 or 13.4 times FY18 earnings.
