PP 7767/09/2010(025354)

Malaysia
RHB Research
29 April 2010
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

B r ief ing Not e

29 April 2010
MARKET DATELINE

Allianz Malaysia Share Price

Fair Value
:
:
RM5.36
RM6.68
Subscribe For The ICPS Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (Allianz; Code: 1163) Bloomberg: ALLZ MK

Net Net
FYE Turnover profit EPS Growth PER C.EPS* P/NTA P/CF ROE Gearing GDY
Dec (RMm) (RMm) (sen) (%) (x) (sen) (x) (x) (%) (%) (%)
2009 2,222.7 118.8 77.2 68.0 11.7 - 2.1 11.7 20.0 1.3 0.4
2010f 2,460.8 110.6 71.9 -7.0 6.9 59.0 1.6 6.2 26.6 1.0 0.4
2011f 2,720.0 132.6 86.2 29.7 7.1 68.0 1.3 7.1 19.7 Net cash 3.2
2012f 2,933.5 153.5 99.7 15.8 6.2 - 1.1 6.2 19.6 Net Cash 3.7
Main Market Listing / Non-Trustee Stock / Non-Syariah-Approved Stock By The SC * Consensus Based On IBES

X Briefing highlights. AMB held an analysts’ briefing yesterday to discuss

the proposed ICPS issue. Although the company had explored various Issued Capital (m shares) 153.8
Market Cap (RMm) 738.6
capital raising options, management decided the ICPS was the best option
Daily Trading Vol (m shs) 0.03
to address the RM490m inter-company loan from Allianz SE, as well as the
52wk Price Range (RM) 3.38 – 5.56
internal capital requirement under the RBC framework. More details on the
Major Shareholders: (%)
ICPS will be given closer to the EGM which is scheduled for 24 Jun.
Allianz SE 75
X Commitments by Allianz SE. Parent, Allianz SE has given its irrevocable
undertaking to subscribe for its 75% entitlement. ICPS that are not taken FYE Dec FY10 FY11 FY12
up by minority shareholders under the rights issue could potentially also be EPS chg (%) 8.3 15.0 12.5

absorbed by Allianz SE. Bank Negara has given its approval for the ICPS Var to Cons (%) 0.0 7.8 10.8

proposal, on the condition that Allianz SE does not convert its ICPS if it
PE Band Chart
would raise its shareholding above 75%.
PER = 7x
X Theoretical EPS dilution. The EPS dilution is dependent on ICPS being PER = 6x
converted, which we think is unlikely to happen. Nevertheless, if we PER = 5x
assume the 25% minority ICPS holders still have the option to convert
(and thus give Allianz the right to convert a similar amount), we estimate
FY11 EPS could be diluted by around 38%. However, we believe this would
be a worst-case scenario as minority ICPS holders would likely prefer to
enjoy the higher dividend rate, unless they want to obtain voting rights.
X Higher dividend payout from FY11 onwards. Once the RBC issues are Relative Performance To FBM KLCI
addressed, management guided that they will be able to move back up to
a higher dividend payout of 50-60% of net profit. This would be the
Allianz Malaysia
combined payout for AMB shares and ICPS. For FY11, this would amount to
a DPS of 38.1 sen and a yield of 6.9% p.a..
FBM KLCI
X Risks to our view. The risks include: 1) lower-than-expected premium
growth; 2) jump in claims ratios; 3) intense competition from insurance
sector liberalisation. 4) A change in BNM policy that would require AMB to
further increase their Internal Capital Adequacy Ratio (ICAR), in
compliance with RBC requirements.
X Forecasts raised. We have raised our FY10-12 EPS forecasts by 8-15%
p.a. after removing the notional interest on the RM490m loan from Allianz
SE from 3QFY10.
X Subscribe for the ICPS. In our view, the ICPS issue is attractive and
AMB shareholders should subscribe for their entitlements. In addition, we
believe the ICPS will not readily trade after listing (assuming the discount
between the ICPS and ordinary shares closes immediately on listing).
Therefore, in order to gain exposure to the ICPS, investors will have to buy
the entitlement either via AMB shares before the rights issue ex-date or Yap Huey Chiang
(603) 92802641
when the renounceable rights are traded. We maintain our Outperform
yap.huey.chiang@rhb.com.my
call on AMB shares and SOP-based fair value of RM6.68/share.

Please read important disclosures at the end of this report.

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 29 April 2010
Briefing Highlights

AMB held an analysts’ briefing yesterday to discuss the proposed ICPS issue:

X Issue of Irredeemable Convertible Preference Shares (ICPS). As highlighted in our 27 Apr News Update on
Allianz, the company has proposed to issue Irredeemable Convertible Preference Shares (ICPS). Details of the
issue will be confirmed closer to the EGM which is scheduled for 24 Jun. As it stands, the only details that have
been announced are: 1) Targeted gross proceeds of RM611m; 2) The ICPS will be issued at a discount to the AMB
share price; 3) Conversion period at any time 12 months after the quotation date of the ICPS; 4) The ICPS would
receive a dividend rate of 1.2 times the declared dividend for AMB shares in the same year; 5) A 1-for-1
conversion of the ICPS to new AMB shares; and 6) Tenure for the ICPS is perpetual. The exercise is expected to
be completed by 3Q FY10.

X Other options explored. Management indicated that the main reason for issuing ICPS instead of other methods
of raising capital is because they want more equity participation, without immediate dilution to the shares. Bank
borrowings or issue of bonds would incur fixed interest costs at the AMB holding company level, while payment of
the interest would depend on the two subsidiaries Allianz General Insurance Company (AGIC) and Allianz Life
Insurance Malaysia (ALIM) to upstream dividends. The risk of this arrangement is that a bad year, or even
regulatory changes with regards to internal capital requirements could affect the amount of dividends from the
subsdiaries, thus causing a cashflow mismatch at the AMB holding company to pay the interest.

X ICPS – the best option. Management thus considers the ICPS to be the best option to raise capital in order to:

1. Repay the RM490m interest-free loan extended by Allianz SE, and thus eliminate the need to incur a notional
interest charge under FRS139.

2. Increase the capital base of AGIC and ALIM to meet their respective Risk-Based Capital Framework (RBC)
requirements. Management indicated that the Internal Capital Adequacy Ratio (ICAR) for both AGIC and ALIM
would meet Bank Negara’s requirement after the capital injection.

3. Working capital.

X Commitments by Allianz SE. Parent, Allianz SE has given its irrevocable undertaking to subscribe for its 75%
entitlement to the ICPS. AMB also intends to procure a further irrevocable undertaking from Allianz SE to
subscribe for new ICPS that are not taken up by minority shareholders under the rights issue. Bank Negara has
given its approval for the ICPS proposal, on the condition that Allianz SE does not convert its ICPS if it would
raise its shareholding above 75%. Therefore, in the event that minority holders of ICPS do not convert, Allianz SE
would also not be allowed to do so.

X Merits of holding the ICPS. We believe the AMB ICPS are an attractive equity derivative, given they rank the
same as AMB shares except for the right to vote. In addition, the AMB ICPS will enjoy a higher dividend compared
to AMB shares. However, we believe these positive characteristics will result in very limited trading of the ICPS,
and very limited conversion into new AMB shares.

X Theoretical EPS dilution. The EPS dilution is dependent on ICPS being converted. As highlighted above, we
believe ICPS conversion is unlikely. Nevertheless, if we assume the 25% minority ICPS holders still have the
option to convert (and thus give Allianz the right to convert a similar amount), we estimate FY11 EPS could be
diluted by approximately 38%. However, we believe this would be a worst-case scenario as minority ICPS holders
would likely prefer to enjoy the higher dividend rate, unless they want to obtain voting rights.

X Higher dividend payout for FY11 onwards. Once the RBC issues are addressed, management guided that
they will be able to move back up to a higher dividend payout of 50-60% of net profit. This would be the
combined payout for AMB shares and ICPS. Assuming 50% payout on FY11 EPS would imply a combined payout
of 38.1 sen, of which 17.3 sen would go to AMB shareholders, while 20.8 sen would go to ICPS holders (see Table
2). This implies a dividend yield of 6.9% p.a.. We have assumed: 1) 190.9m units of ICPS are issued at a price of
RM3.20; 2) There are no conversions to new AMB shares prior to the dividend payment. We note that in order to
receive the full 50% payout ratio, minority shareholders would have to own both AMB shares and ICPS.

Table 2: Dividends
FY11 FY12
AMB Share AMB ICPS AMB Share AMB ICPS
Units (m) 153.8 190.9 153.8 190.9
Distribution ratio (%) 40 60* 40 60*
50% of FY11 PAT (RMm) 66.3 76.7
Payout (RMm) 26.6 39.7 30.8 45.9
DPS (sen) 17.3 20.8 20.0 24.0
*Based on 1.2x dividend rate for ordinary shares Source : Company data, RHBRI estimates

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 29 April 2010

Risks

X Risks to our view. The risks include: 1) lower-than-expected premium growth; 2) jump in claims ratios; 3)
intense competition from insurance sector liberalisation. 4) A change in BNM policy that would require AMB to
further increase their Internal Capital Adequacy Ratio (ICAR), in compliance with RBC requirements.

X Mitigating factors. The mitigating factors are: 1) excellent track record in above-industry premium growth
backed by support of its parent, highly productive sales force, bancassurance tie-up and new products; and 2) life
insurance profit transfer two FYs ahead of schedule as well as potential of higher life transfer going forward.

Forecasts And Assumptions

X Forecasts raised. We have raised our FY10-12 EPS forecasts by 8-15% p.a. after removing the notional
interest on the RM490m loan from Allianz SE from 3QFY10. As the issue is only expected to be completed in the
3Q, 1HFY10 earnings will still include the notional interest charge.

X Assumptions. Our earnings assumptions are based on above-industry premium growth for both the general and
life insurance businesses (see Table 4).

Recommendation

X Subscribe for the ICPS. In our view, the ICPS issue is attractive and AMB shareholders should subscribe for
their entitlements. In addition, as highlighted above, we believe the ICPS will not readily trade after listing
(assuming the discount between the ICPS and ordinary shares closes immediately on listing). Therefore, in order
to gain exposure to the ICPS, investors will have to buy the entitlement either via AMB shares or when the
renounceable rights are traded.

X Maintain Outperform. We continue to like the stock given that we believe it is relatively undervalued due to its
ability to maintain above-industry premium growth but below-industry combined ratio. We thus maintain our
Outperform recommendation and SOP-based fair value of RM6.68/share.

Table 3. Earnings Forecasts Table 4. Forecast Assumptions

FYE Dec (RMm) FY09 FY10F FY11F FY12F FYE Dec (%) FY10F FY11F FY12F

Life premium 868.7 973.0 1,089.7 1,176.9 General

General premium 1,202.4 1,322.6 1,454.9 1,600.4 Premium growth 10.0 10.0 10.0
Other revenues 151.6 165.2 175.4 156.3 Retention ratio 64.0 64.0 64.0
Total Turnover 2,222.7 2,460.8 2,720.0 2,933.5 Claims ratio 60.0 60.0 60.0
Commission ratio 9.8 9.8 9.8
Profit from s/holders (6.5) (6.3) (6.2) (5.2) Mgmt exp ratio 18.0 18.0 18.0
funds
Transfer from general 161.0 164.9 181.4 199.5 Combined ratio 87.8 87.8 87.8
Transfer from life 12.0 13.4 16.0 26.9 Invt return 4.0 4.0 4.0
Finance cost 0.0 (12.5) - -
Life
Pretax Profit 166.5 158.0 189.4 219.2 Premium growth 12.0 12.0 8.0
Tax (47.7) (47.4) (56.8) (65.8) Retention ratio 93.0 93.0 93.0
Claims ratio 7.0 7.0 7.0
Net profit 118.8 110.6 132.6 153.5 Commission ratio 25.0 25.0 25.0
Mgmt exp ratio 10.0 10.0 10.0
Combined ratio 42.0 42.0 42.0
Invt return 5.0 5.0 5.0
Source: Company data, RHBRI estimates

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 29 April 2010

IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
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be contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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