' S$422m gain from sale of legacy holdings in APB &F&N.
' Further stream-lining and divestment of non-core assets to unlock further value.
' Core insurance business is an attractive franchise with market leadership positions in Singapore and Malaysia.
' Stock is attractively priced at 0.9x P/EV versus comparable transactions.
' Over-capitalised balance sheet could be utilised to fund a third privatisation move by OCBC.
' 60% upside to our $24.50 Target Price. Trading BUY.

The sale of its stakes in F&N and APB is unlikely to mark the end of GEH's noncore divestment programme. Remaining non-financial holdings include stakes in WBL and UE, which we believe will eventually be divested to re-invest in its core financial services business. Investors could look forward to special dividends arising from the divestment gains, in our view, in addition to a base dividend of 3%. GEH also offers a potential privatisation play as OCBC seeks to integrate its wealth management platform and realise revenue synergies from an OCBC-GEH merger.

We pegged our valuation at the mid-point of a $22.50-$26.40 range, or $24.50/share. This is derived based on 1.4-1.7x Price/Embedded Value (P/EV) for its core insurance operations and adding back the excess capital within the group. At 0.9x P/EV, GEH offers a compelling investment proposition with potential upside of 60%. Trading BUY.

GEH recently sold its legacy shares in APB and F&N, held since the 1960s and 1970s, to companies controlled by Thai tycoon Chareon Sirivadhanabhakdi for a total consideration of S$2.4bn, realising a hefty pretax gain of $2.18bn. While most of the gains will accrue to GEH's policyholders, GEH itself also realized a net gain of S$422m for its shareholders.

Since 2003, the OCBC Group has embarked on a program of non-core asset divestments and has steadily trimmed down/divested its stakes in Straits Trading, Raffles Hotel, Fraser and Neave, Robinson and Asia Pacific Breweries. Following the latest sale of its stakes in APB and F&N, OCBC's remaining holdings in non-financial companies include stakes in United Engineers and WBL. These are primarily held through Great Eastern and its insurance funds. We believe these stakes will eventually be divested as OCBC completes its exit from non-core holdings and re-invest the capital into growth opportunities within its core financial services business or distribute the proceeds back to shareholders.

GEH has a track record of returning surplus capital back to shareholders. During the past five years, it has distributed a total of $1.2bn (S$2.54/share) to shareholders in the form of dividends and capital distributions. The average payout of $0.50/share p.a. works out to a 3% yield at the current price and represents a payout ratio of 50%.

The latest sale of its APB/F&N generated a net gain of S$422m, or $0.90/share. Assuming that half of this gain is distributed out, total payout for the year could amount to as much as $1.00/share, or a yield of 6%. GEH is currently over-capitalised with capital adequacy ratios for its subsidiaries in Singapore and Malaysia at over 200%, above the regulatory requirements of 120-130%. Any distributions would not impede its growth opportunities in the absence of sizable acquisitions, in our view.

GEH has a strong life insurance business in Singapore and Malaysia, where it dominates its peers in market share. With S$58b in assets and 4.0 million policyholders, it ranks among the strongest insurers in the region and was accorded a rating of AA- by Standard and Poor's. GEH also owns a 70% stake in asset management firm, Lion Global Investors, one of the largest private sector asset management companies in Southeast Asia with AUM of US$24.6bn.

OCBC sees GEH as a core part of its operations and has made two previous attempts to privatise GEH, back in 2004 and in 2006. The first offer was made on a share-swap basis between OCBC and GEH shares, valuing the insurer at S$12.20, or 1.3x P/EV, while the second offer was a cash offer of S$16.00/share, valuing GEH at 1.5x P/EV. The 2004 acquisition of a majority stake in GEH helped to transform OCBC into a larger and diversified financial services group. GEH has since become an important part of OCBC's wealth management platform, through which the bank leveraged to offer clients a full suite of financial services that includes investment and insurance products. In its 2006 offer, OCBC highlights revenue synergies arising from the continuing cooperation and collaboration with GEH in bancassurance, wealth management, credit cards and housing loans. Meanwhile, on the cost front, a potential merger would enable the combined group to enjoy cost savings from shared services.

Given the fit between the two entities and the potential revenue synergies that can be realised in a merger, we believe OCBC will at some point make a further privatisation offer for GEH. GEH today is a significant driver of OCBC's profitability, contributing to 16% of its net profit and 20% of its asset base in FY11. The intention is made even clearer through a stock compensation scheme that rewards GEH management with OCBC stock rather than GEH shares.

Our analysis also suggests that given the excess capital residing within GEH, a privatisation exercise by OCBC could be self-funding, using the surplus capital at GEH to fund a buyout of the remaining minority shareholders. Alternatively, OCBC could offer a share-swap with GEH to take advantage of its P/BV valuation of 1.4x, the highest rating among the local banks.

Among the dissenting minority shareholders that held out on the 2006 privatisation offer are a number of institutional investors such as Marathon Asset Management, New Star Asset Management, First State Investments and the founding members of the Wong family, who saw value in GEH's strong franchise in Southeast Asia and its growth potential in the region. These investors collectively own 8% stake in GEH and any privatisation is unlikely to succeed without the buy-in of these investors.

In the five years since OCBC's last offer, GEH has grown its embedded value per share by 5% p.a. and New Business Economic Value by 8% p.a., with an end-2011 EV of $15.77/share. With the gains from the sale of F&N/APB shares and new business written in 2012, we estimate GEH's embedded value will increase further to $17.30/share by end 2012. Given the steady compounding of GEH's EV, it is in OCBC's interest to privatise
GEH earlier rather than later to avoid a higher price tag down the road.

To derive our valuation for GEH, we applied P/EV multiples of 1.4x-1.7x for its core insurance operations, using recent transaction multiples and past buyout offers from OCBC as reference points. We then add the estimated excess capital of $4.35/share. Our valuation of GEH works out to $22.50-26.40/share, or a mid-point valuation of $24.50/share. At current levels, the stock offers potential upside of 60%.

Even without any buyout offer, GEH offers good value at the current price, trading at 0.9x P/EV, among the cheapest in the region. Besides a 3% dividend yield, we see scope for additional payouts with the divestment gains from its non-core asset sale. We recommend a Trading BUY.

A host of recent M&A activities highlight the attractive prospects of Southeast Asia's life insurance markets and also provides useful reference points on GEH's private market value. In October, ING Groep NV sold its life insurance operations in Malaysia to AIA for a price tag of US$1.73bn, representing a P/EV multiple of 1.78x, on our estimates. ING Malaysia is among the largest life insurers in Malaysia and the sale is expected to catapult AIA to the pole position in Malaysia, leapfrogging GEH as the largest insurer there. In another transaction last month, Richard Li, son of Li Ka-shing, bought over ING's Hong Kong, Macau and Thai insurance units for US$2.14bn in cash and is reportedly looking at expanding into the fast-growing markets of Indonesia and Malaysia. Earlier this week, Prudential Plc announced the purchase of Thai Thanachart Life Assurance Co for US$590m in cash. While global insurers are bulking up their presence in Southeast Asia, GEH is already well-entrenched here, having laid the foundations for growth in Indonesia, Vietnam and China during the past five years.

Source: OSK