No special dividend forecast from Affin post Generali deal


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 sector, and is financially positive for Affin Bank Bhd.

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

“We believe there are the usual cost synergies to be extracted, namely 5% to 6% return on equity against Generali’s 8% to 12%.

“AXA Affin Life Insurance Bhd (AALI) is not profitable and thus, we feel paring down its equity interest is a good decision,” Chan said in a research report yesterday.

He said the move is positive for Affin despite earlier hopes to see a full exit from both AXA Affin General Insurance Bhd (AAGI) and AALI.

“In our opinion, Affin’s risk-reward profile is still favourable,” he said.

Forming the new JV with Generali would include Affin’s general insurance AAGI (49.95%-owned) and life insurance AALI (51%-owned) businesses along with Generali’s general insurance unit in Malaysia.

Following this, Affin will acquire certain Generali’s general insurance assets and liabilities in Malaysia, funded via new AAGI shares’ issuance, thus seeing Affin’s holding 30% equity interest in AAGI and AALI.

There are no pricing details on the disposals, but Affin stands to pocket RM113 million of cash of six sen per share, assuming a price tag of times one book.

“That said, both will likely fetch higher valuations, since the average merger and acquisition price-to-book (P/B) ratio for general insurers is 1.9 times, while for life insurers is 1.4 times,” he noted.

HLIB expects the disposal proceeds would likely be ploughed back to Affin’s core banking business.

Chan also noted that Bloomberg had reported a higher P/B ratio price tag of 1.6 times and 1.9 times for AAGI and AALI respectively.

He added that considering Affin did not fully exit from insurance businesses, the possibility of paying out special dividends is very slim.

“Ploughing back the disposal proceeds to drive its core banking business is not necessarily a bad move as the state of the economy will only get better in time when Covid-19 woes fizzle out in late 2021,” he said.

With the earnings forecast for the bank unchanged, Chan retained the ‘Buy’ rating and target price (TP) of RM2.15 for Affin.

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

He said the current price point is still seen as attractive.

CGS-CIMB Securities Sdn Bhd analyst Winson Ng concurred with Chan that the JV deal would be value-enhancing for Affin.

Ng said the deal would lead to one-off gain estimated at RM157.2 million, which makes 32% of the financial year 2022 (FY22F) net profit forecast and higher earnings contributions from its insurance units.

“The deal did not come as a surprise to us as Affin has been exploring various options to enhance its capital ratios, which would be achieved via the reduction of its stakes in the insurance entities.

“We are positive on the proposed deal as we expect this to lead to one-off gains and higher earnings contributions from its insurance units,” he said in a report yesterday.

Despite the positive views, the brokerage reiterated its ‘Reduce’ call on Affin due to the heightened credit risks from Covid-19, and maintained its FY21F-FY23F earnings per share and dividend discount model-based TP of RM1.30.

“We see higher credit risks for the bank relative to its peers on its high gross impaired loan (GIL) ratio of 3.41% at end of March 2021 versus the industry’s 1.58%.

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

Affin’s shares ended 1.74% higher to RM1.75 yesterday, valuing the company RM3.72 billion.