If successful, the transaction will unlock value to HLFG’s shareholders.
KUCHING: Hong Leong Financial Group Bhd’s (HLFG) obtained approval to commence negotiations for a possible sale of the group’s life insurance business has been viewed by analysts as a ‘positive surprise’.
In a filing on Bursa Malaysia, HLFG announced that Bank Negara Malaysia (BNM) has, via its letters dated June 23 and 29, 2016, stated that it has no objection for HLFG and its wholly owned subsidiary, HLA Holdings Sdn Bhd (HLAH), to commence negotiations with certain parties for the possible acquisition by them of HLAH’s equity interest in Hong Leong Assurance Bhd (HLA) and Hong Leong MSIG Takaful Bhd (HLMT), subject to the negotiations being concluded within six months from June 23, 2016.
HLFG noted that HLA and HLMT are 70 per cent and 65 per cent respectively owned by HLAH.
According to AllianceDBS Research Sdn Bhd (AllianceDBS Research), a prior written approval from the Minister of Finance of Malaysia on the recommendation of BNM is required before entering into any agreement to effect the proposed transactions.
“The announcement was a surprise but we believe this is an alternative way to unlock value for its insurance business if the transaction materialises.
“We had, in the past, considered the possibility of HLFG listing HLAH to unlock value to its shareholders,” the research house said.
AllianceDBS Research noted that if successful, the transaction will unlock value to HLFG’s shareholders.
It further noted that adding Hong Leong Bank Bhd (HLB) at market capitalisation and valuing Hong Leong Capital Bhd (HL Cap) at one-fold book value (BV), is larger than HLFG’s market capitalisation.
This implied that HLFG’s market capitalisation completely discounts HLAH, which was unjustified in AllianceDBS Research’s view for the largest domestic life insurance company.
“The recent transaction by Dah Sing Finance Group (DSFG) in Hong Kong, which recently sold its life insurance business to a China-based company, fetched a 5.7-fold BV multiple.
“Previous merger and acquisition (M&A) transactions for life insurance companies in Malaysia averaged at three-fold BV,” the research house said.
If AllianceDBS Research valued HLAH at three-fold BV, the transaction could unlock RM2.8 billion to HLFG and lift HLFG’s revalued net asset valuation (RNAV) by RM1.20 per share.
“This implies an enhanced fair value of HLFG to RM17.70 (after imputing a 15 per cent holding company discount),” it said.
The research house’s current fair value for HLFG is RM16.60 per share.