MAA: Something brewing?

On 16 June 2015, MAA Group Bhd (Stock Code 1198) announced on Bursa Malaysia that Bank Negara had given the green light for MAA to commence negotiations with Zurich Insurance Company Ltd for the disposal of 75% stake held in MAA Takaful Bhd.

MAA has been classified as a PN17 company since the sale of its insurance arm to Zurich. On its monthly announcement regarding its status as a PN17 company, MAA has sought extension from Bursa Malaysia to draft out a regularisation plan in order to remove itself from the PN17 classification. Since disposing its core conventional insurance arm, there has been some corporate action namely MAA Group disposing its non core subsidiaries which were not financially significant to the Group. MAA Takaful has not been a consistent profit generator for the MAA Group and it could be management's plans to rid itself from the PN17 classification at the same time free itself from the massive capital required to sustain a Takaful operations by putting up the Takaful arm for sale. It has been commented by the Chairman himself of the huge capital base and resources required to compete in the Takaful sector. (http://www.thesundaily.my/news/857707).

On its latest announcement dated 30 November 2015 regarding the sale, an application was submitted to Bank Negara to enter into an agreement by MAA Group and Solidarity (holder of 25% stake in MAA Takaful Bhd) with Zurich. It could be that pricing negotiations has been done or semi completed and an agreement could be announced soon once BNM has given the 2nd green light.

Could there be potential of a risk arbitrage situation where post disposal of the stake in MAA Takaful, MAA Group may be a cash rich company with cash levels above its current market capitalisation?

Note that MAA has been actively buying back its shares in the open market. Based on the company announcement dated 1 December 2015, it has cancelled all its treasury shares previously accumulated (11.6 million shares in total) via share buybacks from the open market. Could this be a sign of full liquidation of and delisting via a payout to shareholders of MAA Group? Nevertheless, share price of MAA has experienced a surge since December 2015 with a current closing of RM0.945.

A sign of undervaluation could be inferred from the continuation of the Company's last 3 buybacks (dated 16, 17 and 18 Feb respectively) of approximately 1 million shares at a price range of RM0.94. Currenct market price as at 18 February 2016 stood at RM0.945.

Final thoughts:

Pros: Management aggressive buybacks. Favourable valuation obtained for sale of MAA Takaful and management unlocking share value via distributions.

Cons. Unfavourable valuation obtained for sale of MAA Takaful, management hoarding cash or deploy in value destroying new core business.

Note: This is not an investment advice. Buy and sell any securities at your own risk.

Disclosure: Long MAA Group Bhd.