"Sell in May and Go Away" OR "Hold in May and Go Away"? You decide.

Here's another article by Bespoke on "Sell in May and Go Away". Click here for the article :) Postings will be very infrequent for now. Season of exams and thesis. Sorry guys. For me, I'm holding in May and go away for now. Happy investing!

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 :)

 

  

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). 

Simon:

"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!