Trading Below Book

Company Updates

MNRB Holdings Berhad (“MNRB”), comprises leading wholesale providers of reinsurance and retakaful as well as a takaful operator. Its reinsurance subsidiary stands tall among the top reinsurers in the region, writing lines of general businesses locally and abroad. In Malaysia, its takaful operator vies among the leaders in the provision of Islamic financial protection services based on the takaful system.

It is currently trading at RM2.46 (as of 1 July 2016), which represents a significant discount of more than 60.0% to its net assets / book value per share of RM6.25. In other words, it is currently trading at its historically low price-to-book (“P/B”) of 0.39x.

The recent low trading multiple valuation was due to its recent loss for financial period ended 31 March 2016:

MNRB_01072016_FS.png

The recent loss was due to the following factors:

MNRB_01072016_FS2.png

Further, MNRB suffers from low valuations because of the risks associated with the nature of its business and a recent spike in calamities in Malaysia, analysts have pointed out. Analysts say that reinsurance is a risky and volatile business and any form of calamities or disasters will affect claims.

“A reinsurer should trade at heavy price-to-book discounts to normal insurance companies.“Reinsurers worldwide trade like that, but MNRB trades at an even heavier discount to global reinsurers because its global peers are more established, bigger, and well capitalised to absorb any claims volatilities,” one analyst says.

http://www.thestar.com.my/business/business-news/2015/04/11/risks-calamities-weigh-on-mnrb-holdings/

Fundamentally Speaking

Management is expecting the coming FY17 results to be satisfactory:

MNRB_01072016_FS3.png

Based on Management’s expectation, we have used the justified price-to-book approach to derive the indicative valuation for MNRB, as shown below:

MNRB_01072016_FA.pngWe have assumed the FY17 forecast revenue to grow at a lower y-o-y growth rate of 2.0% whilst we expect MNRB to achieve a PAT margin of 2.3% which is the average PAT margin for FY15 & FY16. As MNRB’s beta appears low at 0.44, the cost of equity has been adjusted upwards / rounded to 6.0%. If MNRB manages to turn profitable for FY17, we should expect it to trade at a higher price-to-book of 0.54x and thus, a higher potential target price of RM3.52 may be achieved based on an assumed forecast book value per share (FY17) of RM6.50 per share.

Technically Speaking

MNRB_01072016_TA.png

Trends, as well as indicators, are pointing to a short term bearish outlook for MNRB. We see RM2.33 as a strong support baseline, which may potentially be a good rebound / entry point. In terms of resistance points, we see potential profit taking opportunities at first and second level resistance points at RM2.99 and RM3.25 respectively.

Final Words

The Company has a risky / volatile underlying business. Nevertheless, since its share price has suffered a significant decline, this presents potential trading opportunity. Barring any unforeseen circumstance and consistent with Management’s expectation,  we should envisage MNRB to trade at a higher price-to-book multiple valuation.

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