P&O: This one is for its book value

I am not crazy over small insurance companies. This is especially so when over the recent few years, there were quite a spate of major acquisitions by very large insurers where deals such as MSIG took over HLA, AIG taking over ING, Allianz on MBA and several other consolidations in the industry like the ones involving AmG, Kurnia, CIMB, Aviva, Sun.

P&O is a decently managed standalone insurer where it is not bank-backed, does not have direct relation or any particular bankassurance agreement with any of the larger banks or even the larger insurance companies. It was a Jerneh or a Kurnia like before them being acquired. Insurers like this will face increasing competition as tie-ups are very important in the insurance arena. Shareholders funds and strength of the books are very important as well. There are risks which large insurers dare to take while the smaller ones do not have the size or even the experience to take up larger risks.

As such, I was not particularly interested in companies like this having invested into Jerneh before despite it being a well run company. To me, the only attraction with P&O is it being an acquisition target. Market is valuing at least a 2.2x of book value for a Malaysian insurance company.

And very recently, the holding company for P&O did not actually sell out but rather signed a deal for it to sell 49% of its insurance arm to a group under Sanlam. Who is Sanlam? Not particularly big but still it is a much bigger partner for the standalone P&O.

Now, is this a good deal for P&O? It is as I see it, the owner of P&O is selling a 49% stake, (hence still holding a 51% ownership) and for that stake, the price is RM270 million cash valuing it at 2.46x NAV. Not too shabby a deal.

The deal still does not attract me, but what attracts me is the much improvement of the holding company's (listed) balance sheet and book value. Since it is all cash deal, it would have put the company into a net cash company from its current debt of RM88 million to about RM182 million net cash.

At its current market capitalisation of RM314 million, P&O suddenly looks attractive for the immediate term. After the disposal, P&O unlike the other insurers like MAA and Kurnia, does not need to seek other businesses (hence no PN16 or PN17). It still continues to hold a majority 51% stake which is great. On top of that, its current traded price is still below the book value of RM1.60 upon completion of the exercise and the bulk of its holdings in cash.

Whether the company is to distribute the a portion of the cash is currently unknown but what I see was that the company did distribute its excess cash as dividends when it had them. It is not a company which holds on to the cash within the listed company. I certainly hope for the company to distribute the cash if I am a shareholder. The MAA route is not a preferred route definitely and looking at P&O, my gut feeling is that it won't go the MAA route which is holding onto the cash. P&O has been very careful venturing into businesses like money lending despite it having the license to do so. Hence, why hold the cash when you do not need it?

If you read above, the period when there was no dividend in 2009 and 2010 was when the insurer was required to shore up its shareholders funds due to requirement by Bank Negara. When its balance sheet strengthened, it was back to issuing dividends as in 2012.

Besides the book value, is P&O an attractive growth company. It is not. However, since its focus has been into insurance for the motor industry, I believe its profit margin would have increased as the revision in motor insurance rates started to kick in since a year ago, 1 January 2012.

Not too shabby a position in the motor segment

Looking forward with the larger insurers being very aggressive and starting to understand the local insurance market better, I do not see P&O will be a strong growth insurer. It does however has a sweet position in the motorcycle insurance market though as I understand and that portion is hugely profitable. And anyway, the book value still looks attractive enough.