(ET Investments) Public Bank Bhd Poses a Good Buying Opportunity Amidst Fear?

In an unexpected turn of events, Public Bank Bhd (KLSE: PBBANK), one of Malaysia’s largest commercial banks, saw its share price drop by 5.69% following the resumption of trading on 11th October 2024.

The sell-off came after the bank announced its acquisition of a 44.51% stake in LPI Capital Bhd (KLSE: LPI), Malaysia’s 7th largest general insurer. Notably, LPI’s insurance business is operated through its wholly-owned subsidiary, Lonpac Insurance Bhd.

The acquisition was priced at RM9.80 per LPI share, significantly lower than LPI’s recent trading price of RM12.60. This deal values the acquisition at 1.71 times the Price to Book Value (PTBV) of LPI and 12.41 times its FY2023 profit after tax, suggesting that Public Bank managed to secure a sizable discount on this strategic purchase.

Once the deal is finalised, PBBANK’s Earnings Per Share (EPS) is projected to increase from 34 sen to a range of 35 to 36 sen — a positive outcome, albeit under an ideal scenario where all LPI shareholders agree to sell at the RM9.80 offer price. However, the likelihood of full acceptance at this price remains low.

In addition to the acquisition, PBBANK announced a Restricted Offer for Sale (ROFS) for the Teh family to reduce its stake in PBBANK to 10%, in compliance with the Financial Services Act (FSA).

This decision aligns with the vision of the bank’s late founder, Tan Sri Dato’ Sri Teh Hong Piow, who was deeply committed to rewarding his “corporate family,” including employees, staff, and directors, who are also the key contributors to the success of PBBANK.

Based on the years of attending the Annual General Meeting (AGM) and reading Tan Sri’s book — A Banking Thoroughbred, it is clear that his philosophy extended beyond financial success. He valued loyalty and a sense of community within the bank. The Teh family’s low-profile role in Public Bank underscores this vision of shared prosperity, one that rejects the idea of maintaining influence based solely on family ties — a notion often dubbed the “grandfather rule.”

This sentiment of honouring the founder’s legacy may not resonate with all investors, leading some to mis-interpret the reduction in the Teh family’s stake as a negative development. The market’s reaction seems to be driven by short-term concerns, overlooking the deeper, long-term intentions behind the move, namely, honouring the founder’s philosophy while complying with updated regulatory frameworks. This exercise is still beneficial to PBBANK.

The quote by Diona Teh, the daughter of Tan Sri representing the Teh family when addressing the ROFS at the press conference on Thursday, 10/10/24, extracted from the press statement:

From a strategic perspective, the acquisition of LPI could offer considerable upside. The deal not only boosts EPS without diluting existing shareholders but also opens up cross-selling opportunities between Public Bank’s 264 branches across Malaysia and LPI’s insurance products. This synergy could further strengthen Public Bank’s position in the financial services sector, creating long-term value for shareholders.

Quotes from the Managing Director and Chief Executive Officer of Public Bank, Tan Sri Dato’ Sri Dr. Tay Ah Lek in the press statement:

Moreover, PBBANK has one of the highest market shares in terms of motor loans in Malaysia, while LPI is the number one player in fire insurance. Combining both companies’ expertise, this is likely to have a stronger value creation for PBBANK.

In short, the decline in PBBANK’s share price appears to be a reaction to investor uncertainty rather than a reflection of the company’s fundamentals. With the EPS set to improve, a discounted acquisition price, and strong growth potential from cross-selling opportunities, the market’s reaction might be an overreaction.

This situation has led some, including myself, to see this as an opportunity to increase holdings in Public Bank — as the sell down doesn’t align with the underlying value and prospects of the acquisition.