Kurnia may ask for higher price

Analysts expect it to sell insurance arm at between 2.5 and 3 times book value

KUALA LUMPUR: Although no deal has been announced, analysts expect Kurnia Asia Bhd to sell Kurnia Insurans (M) Bhd at a price that values the insurer at between 2.5 times and three times book value.

Recent transactions in the Malaysian insurance industry were done at 1.36 times to 3.3 times. The valuation of Kurnia Insurans will probably be based on its net tangible assets which stood at about RM720mil as at March 31. At 2.5 times book value, Kurnia Insurans will cost up to RM1.8bil. If it is transacted at higher than 2.5 times book, the value of the deal would rise.

Kurnia Asia has a debt of RM360mil and the deal would help transform the company into a cash-rich entity and if the deal is done at 2.5 times book, net cash per share would be 96 sen per share.

Sources said the book-value multiple Kurnia Insurans would be transacted at should be higher than that of MAA Holdings Bhd because the former had complied with the 130% capital adequacy ratio and in fact, it was closer to 180%. The new owner would not need to top up cash to fulfil the requirement.

Sources said several bidders, all foreign multinational insurance corporations, have written to Bank Negara for approval to commence the bidding process.

Over the weekend, a business weekly reported that Kurnia Asia had attracted several interested parties with the aim of hiving off its insurance arm. Kurnia Insurans is ranked among the top five players in the general insurance space.

Investors have been showing keen interest in Kurnia Asia following the report. Kurnia Asia's share price has been on an uptrend since the news broke it traded at 51.5 sen on July 11 and closed at 57 sen yesterday, an increase of some 10.7% in a week ago.

Analysts said the news was not surprising, considering the slew of mergers and acquisitions that have taken place in recent months, including in the banking industry. They doubt if Kurnia Asia would get a high price for the disposal. Instead, they expect it to be in line with the recent transactions.

“Recent speculation and media reports that Kurnia Asia is planning to sell its insurance arm are just an example of the vibrant flow of M&A news in the insurance industry since Bank Negara relaxed the foreign ownership limit to 70% and introduced the risk-based capital framework,” OSK Research said.

The research house said the pricing of recent merger and acquisitions in the insurance industry ranged from 1.4 times to 3.4 times price/book value (PBV).

It said assuming that Kurnia Insurans could fetch a valuation of two times PBV and the sale was entirely in cash, the disposal was expected to fetch around RM1.38bil.

Kurnia Asia's new book value would then increase from RM327.8mil to RM1.02bil, which would translate into an equivalent book value per share of 68 sen compared with the last traded price of 55.5 sen at the close of the morning session on Monday.

OSK Research said the 68-sen fair value for Kurnia Asia represents a short-term target for the share price. It noted that there is no certainty on the price-to-book multiple at which Kurnia Insurans would be traded or what the transaction would entail.

“If indeed the entire Kurnia Insurans is sold, we are not certain if Kurnia Asia would return the entire cash proceeds as it would more likely invest the proceeds in a new business,” it said.

On June 20, MAA Holdings Bhd sold its insurance business to Zurich Insurance Co Ltd for RM344mil cash, valuing its assets at 1.36 times book, which was at the lowest end of the recent transaction. The transaction did not go down well with the market the following day causing the share prices to plunge, hitting a limit down.

Earlier, Jerneh Asia Bhd and PacificMas Bhd disposed of their insurance arms, Jerneh Insurance and Pacific Insurance, at 2.25 times and 1.71 times book, respectively. Berjaya Corp sold its 40% stake in Berjaya Sompo Insurance at 3.35 times book, setting a new benchmark in pricing in the general insurance industry.