OCBC could gain $608m after Great Eastern Malaysia sale

Analysts also expect a special dividend should it sell 30% of its stake.

OCBC’s 87.8%-owned Great Eastern Holdings (GEH) must reduce its stake in Great Eastern Life Assurance (Malaysia) (GELM) from 100% to 70% to comply with the limit on foreign ownership for insurers operating in Malaysia. In a report, UOB Kay Hian said, “Management could divest the 30% stake in GELM either through an initial public offering (IPO) or trade sale. GEH has to submit its plan to Bank Negara by June 2018 and execute the plan likely in H2 2018.”

For its forecast, UOBKH said OCBC could recognise a divestment gain of $608m for vendor sale of its 30% stake during the impending IPO.

UOBKH analyst Jonathan Koh noted that GEH’s Malaysia operations deliver superior New Business Embedded Value (NBEV) margin. “GEH’s Malaysia operations registered total weighted new sales (TWNS) of $362.1m in 2017, which accounted for 27.4% of GEH’s total TWNS. Agency channel contributed 90% of total TWNS. It has successfully recruited 5,200 new representatives during the year. Malaysia accounted for 27.3% of GEH’s profit from the insurance business and 29.8% of GEH’s net profit in 2017. It also accounted for 20.8% of GEH’s embedded value,” he added.

For Malaysia operations, NBEV grew 37% and accounted 39.2% of GEH’s total NBEV. Malaysia delivered higher NBEV margin of 59.4% compared with 34.8% for Singapore.

Moreover, GELM is the second largest player for conventional life insurance with an estimated market share of 23% in Malaysia. “Financial performance is impressive with GELM achieving ROE of 41-47% over the past five years,” he said.

Koh also noted that this would help OCBC which aims to provide steady and sustainable dividends. “Management plans to maintain dividend payout ratio at 40-50% of core earnings. We have assumed that GEH would distribute proceeds from the divestment to its parent OCBC,” UOBKH said.

Based on the broker’s calculations, OCBC could increase dividends every six months from current 19 cents to 20 cents (payout ratio: 40%), 22 cents (payout ratio: 45%) or 25 cents (payout ratio: 50%) based on its forecast earnings of $4.19b for 2018. “Our base-case scenario is OCBC paying total dividend of 44 cents p.a., representing payout ratio of 45% and providing dividend yield of 3.3%. Comparatively, DBS and UOB’s dividend payout ratios are 57% and 39% respectively for 2018. We cautioned that OCBC did not declare any special dividend when it recognised gain of $1.13b for the divestment of 18.2% stake in F&N and 7.9% stake in APB during Q3 2012. Two previous occasions when special dividends were declared in 2003 and 2005 relates to the return of section 44 tax credits to shareholders.”

Moreover, a maximum special dividend of 18 cents is also on the horizon if OCBC returns all proceeds from the divestment of 30% stake in GELM to its shareholders. “Management has repeatedly emphasised that it sees sufficient opportunities for organic growth in key pillars of its businesses. Thus, OCBC is likely to retain and reinvest the bulk of the proceeds from the divestment to its core commercial banking businesses. Any special dividend, if declared, would be quite modest in size.”

However, GELM is still currently seeking strategic investors. “Employees Provident Fund (EPF) and Kumpulan Wang Persaraan (KWAP) are said to have held talks with GEH concerning the acquisition of minority stakes in GELM. Negotiations are complicated by other insurers, such as Prudential and Tokio Marine, who are also wooing the same group of potential strategic investors. EPF and KWAP could still participate in GELM’s IPO even if the trade sale failed to materialise,” Koh said.