KENANGA Research sees a potential case for Public Bank Bhd to tap/expand its insurance presence in its sister company LPI Capital Bhd following the duo’s coincidental request for suspension effective today (Oct 9) pending a material announcement tentatively slated for this Friday (Oct 11).

As it is, the research house noted that Public Bank’s direct exposure to the insurance space is limited to its 30%-owned AIA Public Takaful that is supplementing with Family Takaful products.

“On the flipside, LPI’s general insurance business makes up circa 7% of market share based on BNM’s (Bank Negara Malaysia) 1H 2024 FSR (financial strength rating) where the overall general insurance and general takaful sector commanded a gross direct premium of RM14.6 bil,” revealed analyst Clement Chua in a company update report.

“Given that its market share is not considered dominant, we opine it may not be too far-fetched for Public Bank to seek further opportunities here.”

Yesterday, financial daily The Edge, citing industry sources, reported that Public Bank is expected to undertake an acquisition of a company related to its operations with the first suspect being its principal’s insurance unit LPI Capital Bhd as both requested for a suspension effective today (Oct 9).

Public Bank is expected to hold a media conference on Friday (Oct 11) morning, according to an invitation sent to the media yesterday (Oct 8).

Its media advisory stated that managing director and CEO Tan Sri Tay Ah Lek and “a few key stakeholders” will be sharing important updates and information related to a “major announcement”.

As it is, LPI Is linked to Public Bank by virtue of the latter’s 42.7% shareholdings by Consolidated Teh Holdings which is also the holding company for Public Bank with a 21.6% ownership.

Dilution to CET-1

If indeed a proposed deal is put on the table, Kenanga Research expects this to incorporate a mix of cash distribution and share swaps as a means to not overly dilute minority shareholder interest with such exercise backed by Public Bank’s RM12.4 bil cash pile.

“Hypothetically, fulfilling an equity requirement of 42.7%-100% would translate to the issuance of circa 485 million-1.13 billion new shares or the dilution of 2.5%-5.8% to shareholders,” estimated the research house.

“Regardless, we’re mindful of the impact to the group’s regulatory capital depending on the mode of acquisition.”

As per its understanding of regulatory capital rules, Kananga Research said acquiring an insurance company entails a more punitive treatment that requires the deduction of the entire investments for LPI from Public Bank’s capital level which is “likely to push down Public Bank’s 2Q FY2024 CET-1 ratio of 15.1% (before dividends).”

Based on yesterday’s (Oct 8) closing, the research house sees LPI’s market cap of RM5.18 bil as having translated to 2.3 times PBV (a premium against local insurers average of 1.5 times but still below its applied 2.6 times PBV for its RM15 target price).

“Assuming the same 2.3 times PBV for a fair value of RM5.18 bil, we gather that the transaction could lead to an erasure of CET-1 by c.150bps (basis points) to 13.6% which is still above their minimum target of 13.0%,” projected Kenanga Research.

If indeed an acquisition materialises but not insurance-related in nature, the research house “finds exploring digital assets and lifestyle propositions to be welcomed”.

“This would be to provide a refresh to the group’s image to cater to the younger demographic where peer propositions such as the MAE app (Maybank’s digital wallet) and TnG (Touch ‘n Go) have shown a strong use case and demand for such offerings.”

For now, Kenanga Research has maintained both its “outperform” rating for Public Bank and LPI at a target price of RM5.10 and RM15 respectively.

At the close of yesterday’s (Oct 8) trading, Public Bank was up 1 sen or 0.22% to RM4.57 while LPI surged 22 sen or 1.72% to RM13. – Oct 9, 2024

https://focusmalaysia.my/kenanga-a-potential-case-for-enlarged-insurance-presence-with-public-bank-eating-into-lpi-capital/