Great Eastern - Raising Target to S$15.30 on Improving Outlook

Tuesday, September 1, 2009

set at 1.25x P/EV: Recovery of equity, and stabilization of debt markets should lift GEH's performance, and we now view 1Q09 was the cycle trough for premium sales and new business value. We treat the 3Q09E S$250m provision for "GreatLink Choice" redemption as a one-off, just like the S$213m Malaysia RBC gain in 1Q09. A possible 30% sale of GE Life Malaysia (GELM) may cost S$43m in FY08 profit (15% of group) but generate over S$0.5bn in proceeds.

2Q09 profit S$98m, in line: (1Q: S$237m; S$42m core) premiums +6%qoq to S$1.25bn. Core insurance profit S$128m (1Q: S$65m): par fund profit S$27m, non-par profit S$77m, ILP profit S$23m. 1Q had S$213m (S$195m net of tax) gain from change to risk-based capital in Malaysia. 1H09 DPS S$0.05/share.

GreatLink Choice redemption offer: GEH is making a one-time redemption offer to policyholders of this product, whose market value remains at a steep discount to par due to its underlying CDO investments. The 5 tranches of this product had invested premiums of S$594m, a Jun-09 NAV of S$217m and coupons paid of S$48m. Making some assumptions on redemption, GEH will make an estimated S$250m provision to be reflected in its 3Q09 results.

Possible GELM 30% divestment: With a FY2008 EV of S$1.64bn and FY2008 net profit of S$144.7m, 30% of GELM may generate over S$0.49bn (S$1.04 per GEH share) in sale proceeds, but at the loss of about S$43m in income contribution based on FY2008 profits (15% of GEH FY2008). In July 2009, GELM began a formal bancassurance partnership with OCBC Malaysia, distributing life products through its 29 bank branches.


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