MNRB flexes its rights
Proposed rights issue will help it grow further
INVESTORS have been lukewarm in their support of MNRB Holdings Bhd’s rights issue plan, pushing the shares of the national reinsurer down to a one-and-half year low of RM1.87 mid-this week.
Rights issues generally don’t go down well with shareholders because they dilute their existing holdings if they do not subscribe to the rights. And MNRB’s plan to raise RM400mil from the exercise is seen as large, given that it is about two-thirds of its current market cap of RM604.1mil.
However, the company’s officials think it is a temporary blip.
“We were expecting it ... it’s not uncommon in other companies announcing a rights issuance too,” quips president and group chief executive officer Mohd Din Merican as we settled down for the interview.
On a more serious note, he says that the company is readying for growth after a year of spring cleaning its operations, which saw it removing unprofitable businesses for quality ones, among others.
“The fund raising is not so much driven by regulation. With the capital we have, it would be business as usual.
“We want to grow, hence we are raising capital,” says Mohd Din.
He says the industry is a capital-intensive one and a lot of the things it wants to do are tied to capital requirements.
Last week, Bursa Malaysia gave MNRB the go-ahead for the proposed issuance of up to 479.40 million rights shares to raise about RM400mil.
The price and basis of the rights have yet to be set. The more important question is, will shareholders subscribe to the rights, given that they have not enjoyed much capital appreciation and no dividend has been announced since 2014.
As far as the company’s major shareholder Permodalan Nasional Bhd (PNB) is concerned, MNRB’s group chief financial officer Norazman Hashim says PNB has given its undertaking that it will pick up its portion and the excess.
PNB and the unit trust fund managed by it (Amanah Saham Bumiputera) hold about 12.7% and 42.4%, respectively, in MNRB.
In the insurance space, MNRB has a niche, being the only local reinsurance firm operating through its subsidiary Malaysian Reinsurance Bhd (Malaysian Re).
Reinsurance is essentially insurance for insurers. This means insurance and takaful companies buy insurance from MNRB to minimise risk from going insolvent from unexpected large claims. In return of the premiums received from these players, MNRB would bear a proportion of any valid claims.
Sharing insights, Norazman says the company’s two subsidiaries now have sufficient capital to meet the minimum capital solven- cy ratio of Bank Negara, but additional capital will give it an opportunity to grow.
“For example, in January this year, Malaysian Re commenced a strategic partnership with Lloyd’s of London.
“This is still small, but is the kind of strategic partnerships we are looking at, and that needs capital,” he shares.
According to him, Malaysian Re is now capitalised at RM560mil, while its other subsidiary, Takaful Ikhlas Bhd at RM335mil is one of the biggest capitalised companies as far as takaful is concerned.
From the proceeds raised, the reinsurance unit will get RM100mil and Takaful Ikhlas will be beefed up to RM635mil with an injection of RM300mil.
He explains that Takaful Ikhlas is currently a composite company, which means it holds both the general and family licences. Under the Islamic Financial Services Act, there is a need to split the licence and the minimum requirement for this is a RM100mil capital injection.
“In the takaful business, we are looking at expanding through bancassurance and currently we have tie-ups with two local banks” he says.
Currently, 65% of Malaysian Re’s business comes from the Malaysian market, while the rest is from the Asean and Middle East markets.
As for asset size, it is currently the largest player in the region and second largest by gross premiums, after Indonesia’s state-owned IndonesiaRe.
However, as far as investor perception goes, the stock seems to have lost its lustre in recent years after its once-attractive dividends stopped.
Operation-wise, it has faced a squeeze on underwriting margins as the quantum of claims increased over the years.
The 2014-2015 period was a bad patch for the company, as it was hit on many fronts by a foreign-exchange crisis that saw the ringgit weakening to the US dollar and the company suffering significantly high claims from explosions at Port of Tianjin in China that turned out to be one of the biggest risk loss events in Asia’s insurance history.
The consequence of this was that MNRB fell into the red in FY16.
But Mohd Din says things are looking up for the company.
A turning point was the launch of Malaysian Re’s business transformation initiative dubbed T20 in April 2017.
According to Mohd Din, the transformation has a couple of thrusts, one of which is to defend its position in the domestic market by way of diversification into new products.
For the overseas market, it wants to expand but in a selective manner.
“Over the one and a half years, we removed a lot of unprofitable businesses, especially from overseas.
“We don’t want to underwrite a business for the sake of topline.
“We want to be selective. If the price is not right, we have the discipline to walk away,” he says.
The initiative saw early wins, with net profit doubling to RM140.8mil for financial year 2018 (FY18) ended March 31. Its combined ratio, which are net premiums less of the commissions/ claims, meanwhile, improved to 96.1% from 101.6% back in FY17. Moving into the second year of T20, Norazman says while the capacity is there, the challenge would be to maintain the underwriting margins of about 5%, which is considered good for reinsurance companies.
Can shareholders expect a surprise dividend?
“We have plans to pay dividends, but it is subject to Bank Negara’s approval,” says Norazman, remaining coy on when this can be expected.
Based on yesterday’s closing price of RM1.88, the stock is trading at a price-to-book (P/B) value of 0.39 times and a price earnings ratio (PER) of 4.42 times. Its closest listed peer in the region is Singapore Reinsurance Corp Ltd, which is trading at a P/B of 0.74 times and PER of 6.67 times.