Oversea-Chinese Banking Corporation (OCBC SP) - UOB Kay Hian 2018-03-08: Unlocking Value Through IPO/Trade Sale For GELM

Oversea-Chinese Banking Corporation (OCBC SP) - UOB Kay Hian 2018-03-08: Unlocking Value Through IPO/Trade Sale For GELM OVERSEA-CHINESE BANKING CORP O39.SI

Oversea-Chinese Banking Corporation (OCBC SP) - Unlocking Value Through IPO/Trade Sale For GELM

  • We expect OCBC to recognise divestment gain of S$608m for vendor sale of its 30% stake in Great Eastern Life Assurance (Malaysia) (GELM) during the impending IPO in 4Q18. 
  • We expect OCBC to hike final dividend for 2018 to 22 S cents based on payout ratio of 45%. We expect any special dividend to be modest in size given the need to retain and re-invest to support future growth. 
  • We estimate fully-loaded CET-1 CAR post-IPO of GELM at 12.9%, which would be in line with its peers’. 
  • Re-iterate BUY with higher target price of S$14.95.



WHAT’S NEW


IPO for GELM a key catalyst. 

  • 87.8%-owned Great Eastern Holdings (GEH) has to reduce its stake in Great Eastern Life Assurance (Malaysia) (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 sale. 
  • GEH has to submit its plan to Bank Negara by Jun 18 and execute the plan likely in 2H18.

GEH’s Malaysia operations deliver superior NBEV margin. 

  • Great Eastern Holdings (GEH)’s Malaysia operations registered total weighted new sales (TWNS) of S$362.1m 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. 
  • Malaysia accounted for 27.3% of GEH’s profit from insurance business and 29.8% of GEH’s net profit in 2017. It also accounted for 20.8% of GEH’s embedded value. 
  • 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.

GELM – An amazing life insurance franchise. 

  • GELM is the second largest player for conventional life insurance with estimated market share of 23% in Malaysia. Financial performance is impressive with GELM achieving ROE of 41-47% over the past five years.


STOCK IMPACT

  • We analyse the potential impact on OCBC from the impending IPO of GELM:

Unlocking value through IPO of GELM. 

  • We value GELM at P/B of 6.0x based on Gordon Growth Model (ROE: 42%, COE: 9.5% and Growth: 3%). The 30% stake in GELM is worth S$760m if we apply a discount of 20% for the IPO. 
  • We expect OCBC to recognise divestment gain of S$608m in 4Q18. Its fully-loaded CET-1 CAR would also improve by 0.2ppt to 12.9%.

OCBC aims to provide steady and sustainable dividends. 

  • Management plans to maintain dividend payout ratio at 40-50% of core earnings. We have assumed that GEH would distribute proceeds from the divestment to its parent OCBC.

Impact on regular dividend. 

  • We estimate that OCBC could increase dividends every six months from current 19 S cents to 20 S cents (payout ratio: 40%), 22 S cents (payout ratio: 45%) or 25 cents (payout ratio: 50%) based on our forecast earnings of S$4,192m for 2018. 
  • Our base-case scenario is OCBC paying total dividend of 44 S cents p.a., representing payout ratio of 45% and providing dividend yield of 3.3%. Comparatively, DBS and UOB’s dividend payout ratio are 57% and 39% respectively for 2018.

Potential for special dividend? 

  • We cautioned that OCBC did not declare any special dividend when it recognised gain of S$1,126m for the divestment of 18.2% stake in F&N and 7.9% stake in APB during 3Q12. Two previous occasions when special dividends were declared in 2003 and 2005 relates to the return of section 44 tax credits to shareholders. 
  • We estimate the maximum special dividend at 18 S cents based on the assumption that OCBC returns all proceeds from the divestment of 30% stake in GELM to its shareholders. 
  • Management has repeatedly emphasised that it sees sufficient opportunities for organic growth in key pillars of its businesses. Thus, OCBC is likely to retain and re-invest the bulk of the proceeds from the divestment to its core commercial banking businesses. Any special dividend, if declared, would be quite modest in size.

Seeking strategic investors. 

  • Employees Provident Fund (EPF) and Kumpulan Wang Persaraan (KWAP) are said to have held talks with GEH concerning the acquisition of minority stakes in GELM. Negotiations are complicated by other insurers, such as Prudential and Tokio Marine, who are also wooing the same group of potential strategic investors. 
  • EPF and KWAP could still participate in GELM’s IPO even if the trade sale failed to materialise.


EARNINGS REVISION/RISK

  • We have factored in gain of S$608m from the divestment of 30% stake in GELM to be recognised in 4Q18.


VALUATION/RECOMMENDATION

  • Maintain BUY. Our target price of S$14.95 is based on 1.54x 2018F P/B, which is derived from the Gordon Growth Model (ROE: 10.3%, COE: 7.75% (Beta: 1.05x) and Growth: 3.0%).


SHARE PRICE CATALYST

  • IPO or trade sale for 30% stake in GELM to comply with limit on foreign ownership of insurers, which generates capital for re-investment in OCBC’s core commercial banking franchise.
  • Non-interest income from wealth management, fund management and life insurance will expand in tandem with growing affluence in Asia.




Jonathan Koh CFA UOB Kay Hian | http://research.uobkayhian.com/ 2018-03-08
UOB Kay Hian SGX Stock Analyst Report BUY Maintain BUY 14.95 Up 14.900



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