Analyst: Improved liquidity profile seen from sukuk issuance
IS dividend on the cards for investors of MNRB Holdings Bhd following a restoration in its capital buffers?
This seems to be on the market’s mind following the company’s successful rights issuance in the second half of last year and with a proposed RM320mil sukuk murabahah programme issuance.
Note that the company did not mention any possibility of paying out dividends in its sukuk announcement on Jan 25 but at least one analyst is not discounting this possibility given the improved liquidity profile from the sukuk issuance.
RAM Ratings’ debt analyst Joanne Kek says, in a recent report before the Chinese New Year, that she is expecting the reinsurer to have steadier dividend income streams and it could maintain cash reserves to support near to medium-term profit payments on the sukuk.
“The group’s pre-tax profit had recovered to RM193mil in the financial year 2018 (fiscal 2017: RM99mil) in the absence of one-off provisions from the family takaful segment, and as portfolio rebalancing initiatives at Malaysian Reinsurance Bhd translate into better claims experience,” Kek says in her report.
The planned sukuk murabahah that will be issued is intended to qualify as tier two capital to comply with the requirements of the risk-based capital framework for insurers that was published by Bank Negara on May 31, 2017.
The group says that proceeds from the sukuk is for refinancing MNRB’s existing and future financing and borrowings including to redeem any maturing sukuk murabahah issued under the Sukuk murabahah programme.
Proceeds will also be used for investments into MNRB subsidiaries and other permitted investments.
MNRB is the only local reinsurer in Malaysia and it operates the business through its subsidiary Malaysian Reinsurance Bhd (Malaysian Re).
Reinsurance is what the insurance companies buy to protect themselves from huge losses and is also known as the insurance for insurance companies.
This means insurance and takaful companies buy insurance from MNRB to minimise risk from going insolvent from unexpected large claims. In return of the premiums received from these players, MNRB would bear a proportion of any valid claims.
Kek says MNRB, as a group, benefits from earnings diversification given its reinsurance and takaful businesses, but the ability of MNRB’s subsidiaries to declare dividends has been constrained of late.
The last dividend declared by the company was on Aug 26, 2014 amounting to 16.5% of its par value then.
The company had been a consistent dividend payer until 2014.
Kek says Malaysian Re has recorded underwriting deficits due to adverse claims performance from its overseas segment, while higher reserving requirements for family takaful have led to operating losses.
“As a result, the group’s (MNRB) earnings dipped into the red in the financial year 2016, before turning around in the next two years. MNRB’s cash reserves have also dwindled subsequent to capital injections into subsidiaries,” she says.
After falling for most of 2018, MNRB had regained momentum and in the last two months, gaining about 30% of its share price value.
MNRB last traded at RM1.08 yesterday.
No equity analysts cover the stock and it is trading at a cheap historical price to earnings ratio of 3.73 times.
Dealers say the stock might have staged an ascent since late December 2018 as attention came onto the insurance industry following the government’s plans to introduce its own health insurance scheme for the bottom-40.
Finance Minister Lim Guan Eng had made the announcement late last year that the National B40 Protection Scheme or also known as mySalam B40 insurance scheme will be effective from the beginning of this year.
Meanwhile, MNRB sees very strong major shareholders and the stock is also owned by various fund management houses.
PNB and the unit trust fund managed by it (Amanah Saham Bumiputra) hold 12.7% and 42.4%, respectively in MNRB.
Fitch Ratings had also recently upgraded Malaysian Re’s insurer financial strength rating to A (strong) from A- (strong) with a stable outlook.
“Malaysian Re maintained a regulatory risk-based capital ratio that was well above the regulatory minimum of 130% at end-September 2018. Its score on Fitch’s Prism Factor-Based Model improved to ‘extremely strong’ in the financial year ended March 2018 (FY18) from ‘very strong’ in the previous year, as the company did not declare dividends in the previous two years to restore its capital buffers, following a series of large losses in FY16,” Fitch says in its Jan 24 statement.
“Nevertheless, its capital base remains small compared with that of global peers on an absolute basis. Overall, Fitch expects capitalisation to remain healthy, driven by surplus accretion and retrocession optimisation amid lower premium volumes,” the ratings agency adds.
The increased attention on the insurance industry has helped drive up certain stocks in the sector to a higher level.
For MNRB, the restoration of its capital buffers in the second half of last year had put it on a better footing to enable it to capture more business opportunities.
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