OCBC's offer for GEH opportune following switch to IFRS 17; offer is too low, say minorities

OCBC has made its third offer for GEH after the switch to IFRS17 shaves $2 billion off shareholders equity.

Some market observers have suggested that the offer by Oversea-Chinese Banking Corporation (OCBC) O39 for Great Eastern Holdings G07 (GEH) on May 10 came at an opportune time for the banking group. Here’s why. The switch to IFRS 17 from IFRS 4 shaved $2 billion, or 20%, off GEH’s shareholders equity as reported in FY2021 of $10 billion.

Last year, during a briefing on IFRS 17, which replaces IFRS 4, two items stood out. The first was the change in the level of equity upon transition (as at Jan 1, 2022).

Shareholders equity has been lowered to $8.1 billion. A term, contractual service margin or CSM, which represents the expected unearned profit of in-force business, was introduced, and this was calculated as $7.3 billion. When added shareholders equity, the total (shareolder equity + CSM) worked out as $15.4 billion.

Secondly, new business profit is no longer recognised immediately on the income statement. Instead, future projects are recognised in the CSM on the balance sheet. The CSM is then released into the income statement over the life of the insurance contract as services are provided.

CSM release in 1Q2024 was $183.8 million while the mark-to-market component was $52.2 million. Net profit attributable to shareholders in 1Q2024 was $236.3 million. GEH had higher release of CSM in 1Q2024 compared to 1Q2023 (of $159.3 million), higher profit from general insurance and lower losses from group insurance and the standalone medical portfolio.

IFRS 17 lessens the impact of mark-to-market gains and losses, but it evidently lowered GEH’s NAV. The new reporting standard affects OCBC’s own net profit, which will be less volatile because of GEH’s less volatile earnings.

At a run rate, GEH contributes around $180 million to $200 million per quarter. In 1Q2024, this was $260 million, and it along with trading income boosted OCBC’s net profit to $1.98 billion or $2 billion excluding amortisation of goodwill, well above the Street’s forecast of $1.73 billion.

Hence, while NAV was $21.19 per share as at end-2021, as at end-2023, it fell to $16.66 per share. Embedded value was as high as $38.57 per share, but as at end-FY2023 it was $36.59 per share.

Ong Chin Woo, a minority shareholder of GEH who attempted to table certain resolutions at GEH’s AGM, says the offer price of $25.60 per share represents a valuation of approximately 0.7x EV (1.54x NAV). This valuation is notably below the market average of 0.8x EV observed for GEH between 2011 and 2022.

“The current offer stands substantially lower compared to previous offers made by OCBC in 2004 and 2006, which were at 1.3x EV (2.83x NAV) and 1.5x EV (2.98x NAV) respectively. Additionally, the offer pales in comparison to the Singapore Life Holdings offer of 2.3x NAV in December last year and AIA’s current valuation of about 1.33x EV (2.2x NAV),” Ong says.

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