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Monday December 31, 2012
By OSK Investment
THE insurance industry is expected to see a high single-digit growth in premium income.
The bullish outlook is supported by growing affluence among the middle-income population and healthy consumer spending power; an underpenetrated market (compared with that of developed nations, the penetration rate is 4.5% to gross domestic product (GDP), according to the 2011 Economic Transformation Programme Annual Report) and innovative products through channels like bancassurance and agencies have enhanced the profits from life insurance.
We believe the industry's growth will continue to outpace GDP growth as the Government has pledged to increase insurance protection of the low-income household segments, which bodes well as the Asian region as countries are facing pressure to elevate their respective minimum wage. Should Malaysia follow on this this trend, it should be able to channel more disposable income to purchases of insurance policies.
The Government also recognises the need to safeguard savings, retirement funds and provide health protection for the people. As such, it aims to increase life insurance penetration from 2.8% currently to at least 4% of GDP, or 75% in terms of number of policies over population, by 2020.
The takaful segment is expected to continue registering a high double-digit growth of around 20% through 2014. Insurers increasingly identified takaful as a high-growth, profitable segment. The penetration rate of about 13% for family takaful (measured by number of life policies over population) is an indication of the latent potential for takaful versus conventional life insurance's 55%. That said, the takaful industry is still at an early stage of development, with growth expected to outpace the growth of conventional insurance, supported by the following:
● increasing awareness to diversify takaful from being a niche segment catering to Muslim communities;
● enhanced regulatory reforms to support takaful infrastructure
● identifying common grounds or workable solutions for issues faced by syariah committees and industry leaders;
● stronger participation and liquidity in sukuks and syariah-compliant instruments to support investment income; and
● strengthening takaful and retakaful capacity.
The risk-based capital (RBC) framework for Islamic banking and takaful, expected to be finalised soon, is not expected to significantly differ from the framework applied to conventional insurers, but will, nonetheless, enhance valuations in the takaful sector.
The surge in mergers and acquisitions (M&A) activities as a result of the industry's liberalisation has re-rated industry valuations. The weighted average price-per-book values arising from the transaction values were recorded at above 2.2 times, with the latest deals being the acquisition of ING's business by AIA, CIMB Aviva's stake sale, Pacific and Orient Bhd's divestment to Sanlam Emerging Markets Propriety Ltd and UMW Holdings Bhd's divestment of its insurance unit.
This is due to the ceiling for foreign ownership being raised from 49% to 70% since 2009, increased participation of foreign insurers with greater regional scale and access to capital, and attaining strategic fits to fulfill capital adequacy requirements of the RBC framework and changing regulatory requirements.
We believe the industry consolidation will progress as players are still aligning their operational efficiency to adapt to an increasingly competitive and free market. Any changes in the rules of the game, like Bank Negara's decision to take the cap off acquisition costs and commission rates, may further spur the industry's consolidation as the smaller insurance players may lack the capital and size to compete in a free market.
Therefore, we view the RBC framework for takaful and the Competition Act as key determinants of the direction of M&As in the insurance industry. The industry capital-adequacy ratio of 222.5% in 2011 was above the comfortable internal target capital level and supervisory capital-adequacy ratio of 130% each insurer is required to comply with.
We maintain our “neutral” call on the insurance sector given that it has been substantially re-rated due to M&A activities.
We like Syarikat Takaful Malaysia, we give it a “buy” call and fair value of RM8.02, for its long operating history and leading position in the takaful segment and attractive dividend yields.
We maintain our “neutral” call on LPI Capital, fair value of RM14.82 and Allianz Malaysia fair value of RM8.02 for its resilient underwriting strengths and solid financial performance.
YINSON HOLDINGS BHD
By Maybank Investment Bank
Target Price: RM2.54
YINSON Holdings Bhd's third-quarter net profit of RM8.5mil for the financial year ending Jan 31, 2013 (FY13), increased 5.5% year-on-year, bringing its nine-month earnings to RM29.1mil or 91.3% of our earlier RM31.8mil full-year forecast.
The out-performance was due to stronger-than-expected trading income, 13.9% quarter-on-quarter. We raise FY13, FY14 and FY15 net profit forecasts by 12.5%, 5.9% and 3.9% respectively, imputing stronger trading profit trend.
We maintain a “buy” call and RM2.54 sum-of-parts based target price.
The company trades at just seven times one-year forward price-earnings ratio despite offering a sterling 58% three-year earnings compound annual growth rate anchored by medium- to long-term contracts.
Yinson's third-quarter FY13 net profit fell 13.6% quarter-on-quarter due to lower revenue of 18.3% despite a slight rise 8.2% in earnings before interest and tax (EBIT) margins, increased 1 percentage point quarter-on-quarter.
EBIT grew at both the transport (6.4%) and trading (13.9%) divisions on seasonally higher business activities while the marine unit's EBIT fell 25.1% due to delivery cost related to its fourth offshore supply vessel, a 8,000bhp anchor handling tug supply vessels or AHTS.
We believe the AHTS have been contracted out. Associate income was nominal at RM100,000, with contribution from 40%-owned Phu My port (+RM500,000) offset by administrative and legal costs of the new floating storage and off-loading (FSO) and floating production, storage and offloading (-RM200,000).
The third-quarter FY13 trading division's EBIT of RM8mil is made up of 50.6% of group EBIT, followed by marine 35.6% and transport 13.6%.
Both trading and transport EBIT margins expanded 1.8 percentage point and 1.7 percentage point quarter-on-quarter respectively as Yinson enjoyed greater contributions from more lucrative goods. We think this stronger earnings trend at both divisions is sustainable.
We raise FY13, FY14 and FY15 net profit forecasts by 12.5%, 5.9% and 3.9% respectively as we imputed higher trading income trend.
We now expect a fourth-quarter FY13 net profit of RM6.7mil, representing a slower 21% quarter-on-quarter as we still factor in a slowdown in trading, albeit now at a gentler pace.
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