Selling of Great Eastern Malaysia unlikely to impact OCBC

It accounts for a normalised 6% of OCBC's net profit.

Great Eastern Holdings (GEH) is mulling the sale of its stake in its Malaysian unit for $1.4b.

According to RHB, this is a response to Bank Negara Malaysia's (BNM) requirement of 30% local ownership.

Around 16% of OCBC's net profit comes from GEH. GE Malaysia contributed to its parent company's net profits 44% in 2016 and 32% in 2015.

RHB estimates that GE Malaysia accounts for a normalised 6% of OCBC's net profit.

However, if 30% of the business unit sold, the impact on OCBC is "likely to be relatively muted" at less than 2% of OCBC's net profit.

As of December 2016, GE Malaysia's operations represent 21% of GEH's total embedded value.

"The SGD1.35bn mentioned by the media would value GE Malaysia at SGD4.5bn (assuming it is for a 30% stake), or 1.85x its embedded value," RHB said. "Based on GEH’s implied embedded value of SGD24.71 per share (as of Dec 2016), and GEH last traded price of SGD25.70, we arrive at a premium of 4%."

Here's more from RHB:

If a 30% stake in GE Malaysia were to be sold at 1.85x embedded value, then the excess over embedded value would be ~SGD0.62bn to GEH, assuming:

i. Embedded value of SGD0.73bn for the 30% stake in GE Malaysia;
ii.Selling price of SGD1.35bn for the 30% stake.

With OCBC’s effective 88% stake in GE Malaysia, the excess over embedded value would work out to SGD0.13 per OCBC share, which we believe is not significant.

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