We are reiterating our OUTPERFORM rating on Pacific & Orient ('P&O') with an unchanged target price of RM1.60, valuing the group at an undemanding FY13 EPS of 6.0x. With its existing fundamentals already undervalued by the market, the stock's worth could rise even further on a M&A theme. The biggest South African insurer, Sanlam has submitted an application to BNM to start negotiation with P&O for a potential acquisition stake in P&O's insurance business. We value P&O's insurance assets in the range of 2.0-2.5x its 30 June 2012 BV of RM0.92 on the M&A theme, which is similar to recent transactions valuation on similar M&A deals.

Latest news a boost.  South African Insurer, Sanlam has on 7 September 2012 submitted an application to BNM for  the approval of the Minister of Finance pursuant to the Insurance Act 1996 to review a proposal to enter into an agreement with P&O for the possible acquisition by Sanlam of P&O's 49% equity interest in Pacific and Orient Insurance ('POI'). Earlier on, the media had reported that Sanlam, which is South Africa's largest financial services provider, was exploring a price tag of over two times the net assets of the company (POI).  In a separate report, Sanlam said it is in talks for an acquisition in Malaysia, where it could use some of its 4b rand (RM1.5b) in surplus capital according to its chief executive Johan van Zyl.  Van Zyl said Sanlam is also interested in Indonesia as well.   

Our take is positive.As mentioned earlier, most foreign insurers have an acquisition strategy to enter into the emerging  markets and to expand their presence in the ASEAN region, positioning themselves for further profitable growth.  Malaysia is a highly attractive market with considerable economic potential and a fairly young  and dynamic population. POI is a good candidate to become a takeover target given that the group has a well established distribution network, a niche client base and also significant market share in the motorcycle insurance segment.  All these are a perfect fit for Sanlam, which is looking for an entry into Malaysia.  

Sanlam is strategically an ideal fit for P&O.  The  key to this deal is acquiring P&O's leading general insurance franchise to gain an immediate access into the Malaysian market. In addition, P&O can tap into Sanlam's strength in portfolio investment that should help P&O yield a higher investment income in the future.  In general, the two financial companies complement each other and hence Sanlam represents an excellent strategic acquisition for P&O.