Thanachart Capital

 

TCAP has agreed to sell its life insurance business to Prudential for THB18bn. The gain from the sale will boost the group’s capital while the foregone earnings from this lucrative business should be partially compensated by fee income from its role as a pure sales agent. Although our FY13-14 EPS is lower, we see the deal as being positive for TCAP. Gain from the sale pushes up our FY13F BVPS and target price, though set at a lower 1.2x P/BV (prev. 1.3x), derived from GGM assuming 12.5% long-term ROE. At a discount to book value, TCAP looks cheap, with stronger earnings post operational rationalisation being a rerating catalyst. Outperform maintained.

 

 

What Happened

Thanachart Bank (TBANK), a 51%-owned subsidiary of Thanachart Capital (TCAP), has agreed to sell its 100% stake in Thanachart Life Assurance (TLA) to Prudential Life Assurance Thailand (PLT) for THB18bn in cash. Subject to regulatory approval, the transaction is expected to be completed in 1Q13. Part of the deal is a 15-year exclusive bancassurance partnership.

 

What We Think

Based on TLA’s core profit of around THB1.2bn/year, the transaction price implies 15x P/E and 4.6x P/BV (for 31% ROE), which seems fair and in line with peer valuations. We estimate that TCAP will book a net gain of THB5.3/share from the sale, which pushes our FY13F BVPS up to THB41.7. TBANK’s tier-1 capital ratio will rise from 9.1% to 11.4%, which should dispel market concerns about TCAP’s cash call to recapitalise TBANK. However, TCAP will have to give up profit contributions from TLA, which amount to THB600m/year at TCAP’s level (10% of its yearly profit). The sacrificed profit should be partially made up for by: 1) fee from exclusive sales of PLT products, and 2) yield on proceeds from the divestment. Taking these into account, we revise down our FY13-14F core EPS by 5-7%. This, together with a larger capital base, dampens our FY13-14F ROE by 2%pt to 12-12.7%.

 

 

What You Should Do

We still like TCAP for its cheap valuation, currently at 0.9x P/BV and 8x P/E. Management’s ongoing effort to revitalise the group’s business should continue to bear fruit, prompting the share price to rerate.