Valuation of UAL on the low side

by **Cals** Mon 19 Aug 2013, 05:35

Published: Saturday August 17, 2013 MYT 12:00:00 AM
Updated: Saturday August 17, 2013 MYT 12:35:44 PM
Valuation of UAL on the low side

BY NG BEI SHAN
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PETALING JAYA: DRB-Hicom Bhd’s move to dispose of its 51%-owned insurance asset UniAsia Life Insurance Bhd (UAL) bodes well for the conglomerate’s plans to consolidate its non-core businesses although the valuation of the insurance unit is on the low side, according to a research house.
PublicInvest Research said that UAL was being sold at a price-to-book value (P/BV) of 1.42 times and a price-to-earnings of 30.2 times based on its latest financial results.
“On the surface based on P/BV valuation, the sale price appears to be low as compared to previous transactions. However, the lower valuation is partly justified due to UAL’s lower return on equity and smaller market share,” the research house said in a note to clients.
It was reported yesterday that Prudential Insurance Co of America and Bank Simpanan Nasional’s (BSN) proposal to acquire 70% and 30% of Uni.Asia Life for RM518mil subject to any adjustments has been submitted to Bank Negara.
Bank Negara had on Aug 15 last year said it had no objection in principle for Gadek (M) Bhd and United Overseas Bank (M) Bhd (UOB) – which together owned Uni.Asia Capital which held 100% of Uni.Asia Life – to start talks with parties keen to buy a stake in Uni.Asia Life.
Gadek, which is a unit of DRB-Hicom Bhd, holds 51% in Uni.Asia Capital (which is the holding company of Uni.Asia Life) while the remaining 49% is held by UOB.
Hong Leong Investment Bank (HLIB) Research, however, pointed out that DRB-Hicom’s effective stake, valued at RM264.2mil, was significantly higher than the brokerage’s valuation of RM117.5mil, which in turn translated into a valuation accretion of 7.6 sen per share.
The research house expects the disposal of the other 34.7% in Uni. Asia General to follow soon after the latest divestment, which is also subject to the approval from the Ministry of Finance.
“A successful disposal could qualify the counter as syariah-compliant, widening the list of potential investors and serve as a potential re-rating catalyst,” it added.
CIMB Research, meanwhile, raised DRB-Hicom’s earnings per share by less then 1% for its financial year ending March 31, 2015 and 2016 to incorporate interest-cost savings from the paring down of debt.
It also said DRB’s net tangible asset (NTA) would rise marginally from the sale, which raises its target price to RM2.84 from RM2.75 but maintained its neutral call pending the restructuring of Proton Holdings Bhd.
“As highlighted before, the main issue with DRB-Hicom is its high cost of debt at over 6% while Proton does not make enough money to pay for the RM2.4bil loan that it initially took to acquire the national car company,” CIMB Research said.
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It added that investors should stay sidelined until the direction for restructuring the national car maker was clear but noted that downside for the stock was limited as it continued to trade below its NTA.
HLIB Research was more upbeat about the firm’s prospects due to its long-term restructuring plan, and transformation into a leaner operational conglomerate with regional automotive presence and extracting synergies within the group.
Bloomberg data showed that analysts had a consensus target price of RM3.29 on the counter. Five out of the eight research units covering it called it a “buy”.
The stock rose nine sen yesterday to close at RM2.70.