Officially Entered Into SPA For The Disposal Of Jerneh
? Disposal is at 2.13x P/B. Paramount announced that, together with Jerneh Asia Bhd (JAB), it had entered into a conditional share purchase agreement (SPA) with ACE INA for the disposal of their respective equity interest (Paramount 20%, JAB 80%) in Jerneh Insurance Bhd (JIB). To recap, the acquirer - ACE INA is a US-based insurance company, providing commercial property and casualty insurance and re-insurance services. The proposed disposal is for a total cash consideration of RM654m – RM130.8m for Paramount and RM523.2m for JAB. This translates to a valuation of 2.13x P/B, based on JIB’s net book value of RM307m as at June 2010. Note that, the SPA is conditional upon Paramount and JAB obtaining their respective shareholders’ approvals within 60 business days following the signing of the SPA or such later date agreed in writing by the parties.
? A potential gain on disposal of RM76.6m. The aggregate purchase consideration of RM654m is still subject to upward/downward adjustments of up to RM30m, based on the accounts submitted by JIB as of one month after the SPA becomes unconditional. According to Paramount, it could tentatively realise a gain on disposal of about RM76.6m in 4QFY10, which is when the deal is expected to be completed.
? Buy on dividend angle. In the announcement, Paramount’s Board is still assessing the optimal utilisation of the cash proceeds from the proposed disposal. To re-iterate, given a 20% stake in JIB, Paramount would pocket about RM131m or a cash per share of about RM1.08. We hence continue to believe that the proceeds would give scope for a special dividend. Assuming a 30 sen special dividend is paid, in addition to our FY10 DPS forecast of 29 sen, this would translate into a generous yield of 13%.
? Risks and concerns. The risks include:
1) cap on loan-to-value ratio imposed by Bank Negara Malaysia;
2) higher tax bracket for real property gain tax (RPGT);
3) delays in launches and approvals; and
4) country risks.
? Forecasts. Normalised earnings remained unchanged. However, a gain on disposal of RM76.6m is included in our headline net profit forecast.
? Maintain Outperform. Our indicative fair value is kept at RM5.80, based on an unchanged 35% discount to RNAV. Maintain Outperform.
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