Hong Leong Financial : Negotiation for potential disposal of stakes in HLA and HLMT terminated BUY

STOCK FOCUS OF THE DAY

Hong Leong Financial : Negotiation for potential disposal of stakes in HLA and HLMT terminated                BUY

We maintain our BUY recommendation on HLFG with a lower fair value of RM17.60/share (previously RM18.10/share) based on sum-of-parts valuation. We have assigned a lower P/BV of 3.0X (previously 3.5x) on Hong Leong Assurance (HLA) after negotiations to dispose its 70.0% stake in HLA and 65.0% shareholdings in Hong Leong MSIG Takaful (HLMT) were terminated. The Group announced that it could not reach an agreement with certain parties on the deal to dispose its 70.0% and 65.0% equity stakes in HLA and HLMT respectively.  We believe that the parties to the negotiation could not come to an agreement on pricing.

We understand that the parties interested in HLA and HLMT were looking at 100% equity interest in both HLA and HLMT as well as a plan to strike a bancassurance deal with Hong Leong Bank for the distribution of banca products through the bank’s delivery channels. This would require the parties to not only take up HLFG’s 70.0% and 65.0% shareholdings in HLA and HLMT respectively, but also acquire HLFG’s partner, MSIG Malaysia’s 30.0% and 35.0% shareholdings in both the entities. When MSIG Malaysia acquired the 30.0% stake in HLA from HLMT in 2010, it paid a high price of RM940mil which translated into P/BV of 6.5x, higher than the present average P/BV for M&A deals of life insurance companies of around 3.0x. Subsequently in 2011, MSIG Malaysia acquired 35.0% equity in HLMT for RM33.6mil (circa 1.0x P/BV). We believe the that high price MSIG Malaysia paid for its 30.0% equity in HLA to be key reason which led to the parties to disagree on the pricing for the deal terminate the discussions.  We maintain our forecasts. Our BUY rating on HLFG remains. We continue to see the current share price of HLFG as mainly valuing the Group based on its 64.4% stake in Hong Leong Bank, a bank with resilient earnings and stable asset quality while undervaluing the other parts of its business in Insurance, Investment Banking and Asset Management.

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