Sunday, April 10, 2011

MAA deal: More truth to NST report? (Amended - Additions)

After a closer look at MAA’s past deals and the commentators’ views, there could be more truth to what NST had reported last week. MAA had been attempting to sell its insurance business since 2007 but with no results until now. Look at the sequence of events below:

July 2007: Plans to sell 49% of MAA Assurance
Sept 2007: News of talks with Allianz, AXA, Affin, Kurnia and Nippon Life to take up stake in MAA Assurance. Consequently, share price rose 47 sen to RM2.15
Oct 2007: Plans to take private mentioned by Tunku Yaacob (TY) in NST but company board announced it’s unaware of such plans
Nov 2008: MoU with AMG to sell general insurance business for RM274.8mil, representing a P/BV of 2.6x.
Nov 2008: TY announced that he will not be taking private MAA.
Apr 2009: Sales price of general insurance business revised to RM254.8mil
July 2009: BNM approved the sale of general insurance business.
Feb 2010: Sales price of general insurance business revised to RM180mil.
Dec 2010: Discussion on sale of general insurance business discontinued
Apr 2011: Discussion on sale of  70% stake in General and Life Insurance to Zurich with a rumored amount of RM1.2 bil.

Points to consider:
AMG kept on revising downwards the valuation of MAA’s general insurance business (General) from RM274.8mil to RM180mil. Why? Could it be due to the poorer prospects of the business or the business is found more and more screwed-up as AMG delved deeper into its business???

General’s revenue and profit had been increasing since 2008 whereas its life insurance business (Life) ran quite the opposite way. General’s revenue is about half of Life’s but General’s profits are far superior to that of Life’s. General’s operating profit (Note: Not net profit) at RM63.5mil whereas Life’s operating profit recorded operating loss of RM8.2mil as at 2010. Another question: Despite General’s revenue and profit increase, its valuation kept revalued downwards by AMG.

How much is Life’s business worth? AMG was only willing to pay for MAA’s General business at RM180mil but I guess TY thought this was too cheap for him to sell. Maybe TY will only sell it at above RM300mil (closer to the initial sale price agreed by AMG). Ok. If we just use sales as benchmark, Life’s business could be worth RM600mil. 70% of both businesses would be RM630mil ([RM600+RM300] x 70%).

Jerneh sale at P/BV of about 2.1x. (not 1.2x as written earlier, sorry guys) Kurnia Asia is trading at P/BV of 2x. What about MAA? MAA’s business is about twice the size of Kurnia Asia and >5x that of Jerneh. Perhaps P/BV of 2.0x to 2.5x would be a better gauge? That would value MAA’s shares at more than RM2.00 already.

As mentioned by Simon in the previous post, Zurich will certainly revamp the whole business and perhaps bring MAA’s businesses closer to Zurich’s performance. Let’s just say within the next 2 years, its profit margin could be improved from about 1% currently to about 5%, net profit will be at RM100mil. Attaching PE of 10x would value the business at RM1bil. 70% of it would be RM700mil or RM2.30 per share.

Having said all these, the worry point is whether this deal could fail again like in the past and the management's past record is not helping to convince investors.

My take: High risk, high return. You might have a profitable trade here but it could burn your fingers easily as well. It’s entirely your call :p Anyone could enlighten me further on this? Welcome further thoughts and commentaries!!

PS: Just read The Edge Weekly on MAA. Deal could be RM400-500mil? P/BV of 2x? This deal with Zurich most likely will materialize, but at what price? But even if it's RM400mil, the stock is cheap at RM1.34 with P/BV of 1.4x. For me, I'll place my bet for now that it'll rise :p Let's see how it works out :)


Saturday, April 9, 2011

Some views on MAA's deal with Zurich

Since MAA is quite a hot topic over the past week and looking at the extreme price movements, I think it's good to post some contrasting views on MAA below, thanks to the nice people who care to write and comment on MAA to me and other bloggers (I'm borrowing from Dali's commentators on MAA as well). 


"M&A for RM1.2b of the 70% is cheap as they are buying life insurance license, existing agent of 12K. Turnover is growing at base of RM2.2b. Zurich is making 10% profit, thus MAAB under Zurich will soon resemble Zurich's profit margins with cost-cutting and downsizing of workforce (as u know many are deadwoods). This would translate to RM220mil profit within the next 2-3 years. Given PE of 8x, the company is worth around RM2bil, 70% stake for RM1.2bil makes sense. Besides, Hong Leong bought a smallish bank just for the license, and paid RM1bil for the license back in early 1990s. Look at the valuation of Hong Leong bank now?

Another interesting thing to look at is, with the 30% remaining stake in MAA under zurich. Imagine the dividend it will receive every year if the profit is say, RM300mil. Assuming 50% is paid through dividend, RM50mil profit for MAA by just sitting there doing nothing. Going forward, when the govt allows 100% ownership of foreign insurarer, Zurich might fork out another RM1.2bil to buy remaining 30% stake. So, the fair value for MAA for longterm investor could be RM5 as a start. As it had been lying low for so long, many will think that it is not worth this much now."

From Dali's commentator, Jeff:

"Bro, cannot be typo error. Look at MAA turnover & profits. That should explain all. TY has said previously that he wants 300 to 500m for the general insurance business. Now the deal is 70% of MAA that includes the life insurance also. Zurich gets management control hence the premium in the deal. Why the share does not limit up? Cos nobody trust TY as he has cried wolf to many times. So anybody who has the share will dump it. Someone leaked the news. That's why the earlier denial. Who benefits most from the deal? TY & gang who holds majority. Cash minus loan of 200m still translates to 1b bal. He will do a Melewar & declare RM2 capital repayment. Again who benefits? MAAH will still have 30% to ride on Zurich minus the headache plus Takaful which he can still sell later. Remain debt free & venture into new business. Still who trust TY? That's why everybody dump the shares based on lunch time vol of 45m . Who ultimately gain more if the deal goes through? This is a very smart wolf. since nobody trusts TY & repeated denial normally means there is some truth to the deal. Even if the deal is between 600 to 900m is still big money. TY wants everybody to dump MAA but he is not gonna fool the mkt all the time. Time will tell. See whether he can redeem himself now. But who trust TY???"

Will post reply soon if any :p Got to go now. Happy thinking!

Friday, April 8, 2011

Stocks Unleashed (ASX): Marengo Mining (MGO): A Future Takeover Target?

By Peter Koay

Comparison of Marengo Mining (MGO) and Equinox (EQN)
With the news of the US$6.5B bid for Equinox from MinMetals hitting the markets yesterday, timed at a point where copper price is still hovering above $4, this helps provide confidence to the markets that there is a brighter future to copper beyond the immediate future. This suggests that copper price may well be set to be above $4 in the years to come (this confirms my earlier assumption of $4/lb average copper price for the years to come). Demand for copper is forecasted to be outstripping the supply for this year and the following year, and it seems that this scene won’t be changing in the near-term as it does take quite some time to prove and bring out copper resource from the ground.

I’ve done some comparisons of Equinox and Marengo considering that Equinox is a pure-copper play.

A summary of the comparison:

§  MGO’s M&I copper resource is about 50% of Equinox’ Lumwana Project

§  MGO’s capital cost is twice the capital cost of Lumwana (this may be due to cheaper construction costs in Africa compared to PNG).

§  MGO has the potential to become the top 15 largest copper producer in the world when it ramps up to 50Mt (at ~0.5% Cu), i.e. production rate of 250ktpa, making it to be in the league of Equinox.

§  MGO and EQN’s operating costs are similar.

§  Note the ratios (highlighted in green) to compare Yandera Project with Equinox’ Lumwana or Jabal Sayid projects. This indicates that MGO in 2-3 years time shall at least be 8-10 times the market price of today.  

§  Note the comparison of Jabal Sayid’s project with Yandera project: This shows the potential that MGO has to become at least a $1B mkt cap company (even before achieving production). My thoughts is that it’ll reach $1B market cap when DFS is released, EPC Lump Sum contract signed, project financing completed(targeted for Nov’11) and offtake arrangement contracts signed. So, $1/share for MGO by end of this year is not an unrealistic target.
Note that MGO share price has been hovering between $0.30-$0.32 over the past week, with a breakout today to finish at $0.335. The share price was consistently capped by ~1M shares buying at $0.31 and 1M shares selling at $0.32. It is believed that some big funds are accumulating MGO shares to force out weak holders of the share in anticipation that the share price shall go up when the DFS is released.

These two caps have been removed today, with dad & mum investors to provide the next push to $0.40. The share has recently been also reported on the HeraldSun newspapers, promoting public awareness of this share. Refer to:

So far, Eureka and HeraldSun have reported on this share. I’m expecting to see ‘BRW’, ‘AFR’, ‘The Age’ and ‘The Australian’ to report on this share shortly. This will provide some additional boost to the share price ahead of the DFS announcement.

DRB-Hicom Call Warrants: Simple overview

I just did a simple calculation on the call warrants for DRBHicom, for those who want to have a higher leverage on DRBHicom. From the table above using simple calculation for the target prices (I'm not incorporating any time value to the target prices, requires some time and data to calculate, dependent on when and what price DRB can reach as well), DRB-Hicom-CE appears to be the most attractive. Nonetheless, one should take note of the expiry date as the closer the warrant gets to the expiry date, the less worth it will be. Thus, the faster the mother share (i.e. DRB-Hicom) moves, the more accurate the table would be and DRBHicom-CE would probably move the fastest in percentage terms as compared to other call warrants.

I'm just beginning to explore these instruments. Welcome any thoughts and suggestions. Thanks :)


Thursday, April 7, 2011

Another dubious report??? MAAB's sale to Zurich, too good to be true?

Btimes just issued a news report (Click here for the report) on MAA's sale of its 70% stake in Malaysian Assurance Alliance Bhd (MAAB) to Zurich at a price of RM1.2bil!!! This just sounds too good to be true to me. RM1.2bil just for 70% stake in MAAB. This could mean that MAA's 100% equity stake in MAAB could be worth RM1.7bil or RM5.58 per share!!! This price sounds even more puzzling when the price excludes its Takaful business, unit trust business and a host of other subsidiaries and associates (Mithril, Maybach and other international insurance businesses).

Expectantly, MAA came up with a statement to deny the report, a usual case of M&A denials which were highlighted again and again by Moolah. I'm very curious as well about the authenticity and credibility of the authors of these reports. Maybe the financial regulators should just look into the stakes these authors have in the shares they feature. Some people must be making big bucks out of these reports.

Anyway, MAA did confirm that they are talking with Zurich about the sale of MAAB. But the question is how much? For me, I wouldn't want to fork out RM1.2bil to acquire a business that hardly generates any decent earnings (Volatile earnings and very low margins, P/BV of >>4x, PE can't even be used). Last year, MAA even talked with AmG to sell its MAAB's general insurance business for RM180mil but even at that price the deal didn't go through, what's more with this incredulous RM1.2bil for just 70% stake in MAAB? Normally, takeover price is expected to be about 1.5x-2.0x P/BV for less quality insurance companies (Jerneh sale was at P/BV of about 2.1x (Not 1.2x as written earlier). Attaching P/BV of 1.5x to MAA's net asset/share of RM0.94 should draw the share price closer to RM1.41, provided that this sale is highly possible.

RM1.2 bil for 70% in MAAB? Nah..RM200 mil looks more like it.