We maintain our GGM-derived PBV TP of RM5.10 (COE: 9.9%, TG: 4.0%, ROE: 13.0%) and OP call. Citing sources, a leading business newspaper reported that PBBANK, which has scheduled a press conference for this Friday (11 Oct), could be acquiring a related company. LPI (OP, TP: RM15.00) was named in the article, and we examine the merits of such a move, which would be to broaden PBBANK's direct exposure to the insurance space, and entail a restructuring of the latter's books. At time of writing, both PBBANK and LPI have requested for a suspension of trading on 9 Oct 2024. PBBANK is one of our Top Picks for 4QCY24.

Yesterday, The Edge reported that PBBANK is expected to undertake an acquisition of company related to its operations, with first suspects to be tied to its principal's insurance unit, LPI Capital, as named in the same article. LPI Is linked to PBBANK by virtue of its 42.7% shareholdings by Consolidated Teh Holdings, which is also the holding company for PBBANK at 21.6% ownership.

A case for an enlarged insurance presence. PBBANK's direct exposure to the insurance space is limited to its 30%-owned AIA Public Takaful, supplementing with Family Takaful products. On the flipside, LPI's general insurance business makes up 7% of market share (based on BNM's 1HCY24 FSR, where the overall General Insurance and General Takaful sector commanded a gross direct premium of RM14.6b). Given that its market share is not considered dominant, we opine it may not be too farfetched for PBBANK to seek further opportunities here.

Structural clarity is much needed. Based on yesterday's closing, LPI's market cap registered at RM5.18b, which translates to a 2.3x PBV (a premium against local insurers average of 1.5x but still below our applied 2.6x PBV for our TP of RM15.00).

We believe if indeed a proposed deal is put on the table, this may incorporate a mix of cash distribution and share swaps as a means to not overly dilute minority shareholder interest, backed by PBBANK's cash pile of RM12.4b. Hypothetically, fulfilling an equity requirement of 42.7%-100% would translate to the issuance of 485m-1,133m new shares or the dilution of 2.5%-5.8% to shareholders.

Regardless, we are mindful of the impact to the group's regulatory capital, depending on the mode of acquisition. Per our understanding of regulatory capital rules, acquiring an insurance company entails a more punitive treatment that requires the deduction of the entire investments for LPI from PBBANK's capital level, likely to push down PBBANK's 2QFY24 CET-1 ratio of 15.1% (before dividends). Assuming the same 2.3x PBV for a fair value of RM5.18b, we gather that the transaction could lead to an erasure of CET-1 by 150 bps (to 13.6%), which is still above their minimum target of 13.0%.

Digital gaps would also make sense. If indeed an acquisition, as reported by the paper, materializes but not insurance-related, we examine other complementary areas. And depending on terms, we find 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 MAE and TnG have shown a strong use case and demand for such offerings.

Forecasts. Unchanged for now. We await further clarity following the suspension of both PBBANK and LPI on 9 Oct 2024. If no details are shed, we await the media briefing to be held on 11 Oct 2024, as reported by The Edge.

Maintain OUTPERFORM and TP of RM5.10 based on an unchanged GGM-derived PBV of 1.54x (COE: 9.9%, TG: 4.0%, ROE: 13.0%) on a FY25F BVPS of RM3.14. We also applied a 5% premium to our TP based on our 4-star ESG rating, led by the stock's strong green financing pipeline. PBBANK is expected to continue commanding a leading GIL ratio amongst peers which could be attributable to its densely collateralised housing loan portfolio. We believe appreciation for safety will be more prevalent in the coming quarters in anticipation of asset quality leakages following the anticipated high economic growth phase. PBBANK is one of our 4QCY24 Top Picks.

Risks to our call include: (i) higher-than-expected margin squeeze, (ii) lower-than-expected loans growth, (iii) worse-than-expected deterioration in asset quality, (iv) slowdown in capital market activities, (v) unfavourable currency fluctuations, and (vi) changes to OPR.

Source: Kenanga Research - 9 Oct 2024