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FINANCIAL CHRONICLE™ » FINANCIAL CHRONICLE™ » AAIC Intrinsic Value

AAIC Intrinsic Value

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21AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Thu Mar 14, 2013 5:19 pm

Jiggysaurus


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
@rainmaker wrote:Look at the annual report issued. All of the above stuff are missing the most important part. This part makes all of the above talk look rubbish.

Don't think of assets or equity all the time. Also don't always look at the financial statements. Some other stuff are insightful. @ Alchemist & Jiggy lets see if you can find it.


The only insightful stuff as to why Pathirage would buy this is to use the Insurance float to invest/prop up his group companies and occasionaly invest in some debentures in his debt heavy hospitals.

Also he can cross sell using his group businesses. Buy a TV get insurance from AAIC, before going in for a surgery buy some Life insurance.

22AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Thu Mar 14, 2013 6:13 pm

knockknobbler


Manager - Equity Analytics
Manager - Equity Analytics
@The Alchemist wrote:
@knockknobbler wrote:
@Gaja wrote:[quote="knockknobbler"

Thanks… for your thoughtful write up.
I wish to raise few points. For the sake of clarity , I’ll separate your passage. .
“If we look at the facts, SHL Group control approx 96 % of AAIC. They sold 19 % each to two seemingly unrelated parties (totally 38%) at a premium of over 50 % to the current retail price for minority interest. The issue here is weather the 2 parties who bought the share are unrelated, not acting in collusion for some other 3rd party who may takeover AAIC at a future opportune time. The Mandatory offer to balance 4 % of minority shareholders at Rs 128 was not triggered due to this 38 % sale to two unrelated parties not acting in concert.”
Agreed. I presume this arrangement conforms to existing rules /regulations .

“As regards the Price, it is hard to figure out the Intrinsic Value of AAIC due to volatility in earnings (full year EPS Rs. 1.90, 4th Q EPS Rs. 3.70). AAIC has sold this stake at approx just over 3 times Book Value (btw Book value of approx Rs 40 consists of 75 % or Rs 30 worth of NDB Shares). Generally a Premium is paid for large stakes irrespective of Intrinsic value, for factors such as Control, Board Representation, Synergy, Goodwill etc which is not apparent in this case”.
I am not familiar (or believe) in intrinsic value of a share. But I agree, in order to acquire a large stake a Buyer may be willing to pay premium price from the prevailing market value. That is entirely up to the buyer.

“Minority shareholders consisting of approx 4-5 % of AAIC are widely dispersed and cannot expect to receive this Price Premium unless in the case of a mandatory offer. (They are the guys who have to worry about Intrinsic Value !). “

This is the way things are happening now, and ….that ‘s what I am questioning . You are emphasizing minority shareholding is 4-5% . In this case that’ true. But even minority shareholding is 20-30% , this transaction can take place. That is, a share holder owning 38% can sell that @ 128/- ( to two parties who are willing to buy ) ,where as all other minority shareholders are stuck at 80-/. Though there are 2 buyers willing to buy @128/- , only one party got the opportunity to sell.
My question is ….is this fair ? Is this conforms to the principles of market mechanism ? (That is...... price is determined by supply and demand)
If this happens , then there are two tiers of market. All these EPS , NAV based valuations ,and also the intrinsic value calculations…. will go for a six !

Furthermore, a mandatory offer was made by SHL Group in Aug / Sep 2011 to buy up shares at Rs 120 from minority shareholders who further had a chance to exit at over Rs 300 in the market. So maybe fair enough for minority shareholders who are not getting this premium now due to this current transaction, ………

This is completely out of the issue at hand. What is the relevancy to the current issue …. that Minority share holders got an offer @ 120/- in the past or the prices went up to 300/- a year back ? I hope we are not trying to console minority shareholders !

23AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Thu Mar 14, 2013 7:24 pm

The Alchemist


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@knockknobbler wrote:
@The Alchemist wrote:
@knockknobbler wrote:
@Gaja wrote:[quote="knockknobbler"
“Minority shareholders consisting of approx 4-5 % of AAIC are widely dispersed and cannot expect to receive this Price Premium unless in the case of a mandatory offer. (They are the guys who have to worry about Intrinsic Value !). “

This is the way things are happening now, and ….that ‘s what I am questioning . You are emphasizing minority shareholding is 4-5% . In this case that’ true. But even minority shareholding is 20-30% , this transaction can take place. That is, a share holder owning 38% can sell that @ 128/- ( to two parties who are willing to buy ) ,where as all other minority shareholders are stuck at 80-/. Though there are 2 buyers willing to buy @128/- , only one party got the opportunity to sell.
My question is ….is this fair ? Is this conforms to the principles of market mechanism ? (That is...... price is determined by supply and demand)
If this happens , then there are two tiers of market. All these EPS , NAV based valuations ,and also the intrinsic value calculations…. will go for a six !


Yes it is fair. because say if you own 10 % out of the total minority interest of 20-30%, if there is a willing buyer (as in this case), you may get the premium price if your broker can negotiate with a willing buyer. The reason you are not getting the premium price is the minority interest % is widely dispersed among many shareholders and no one can offer a particular "block" to command a premium price. so, yes price is determined by supply and demand, the demand is there for say a 38 % block but since the minority interest collectively own only 4-5 % in a very fragmented holding in this AAIC case, they cannot supply the desired qty so they cannot get the premium price on offer.
Even in the case of say the minority's interest collectively owning 20-30% and if this holding is fragmented amongst many owners, no single shareholder can expect to command a premium price unless a mandatory offer is triggered. In fact that is why the 30% mandatory offer trigger rule is there to protect minority shareholders against abuse from controlling interest.
.

Furthermore, a mandatory offer was made by SHL Group in Aug / Sep 2011 to buy up shares at Rs 120 from minority shareholders who further had a chance to exit at over Rs 300 in the market. So maybe fair enough for minority shareholders who are not getting this premium now due to this current transaction, ………

This is completely out of the issue at hand. What is the relevancy to the current issue …. that Minority share holders got an offer @ 120/- in the past or the prices went up to 300/- a year back ? I hope we are not trying to console minority shareholders !

No i am not trying to console minority shareholders ! What i'm trying to say is, having got a opportunity to exit / sell earlier, the minority shareholders should not feel hard done by now, if a premium price (similar to what they may have been offered in the past) is now being paid by a strategic buyer for a substantial block, to their exclusion, simply because their 4-5 % collective stake is widely dispersed and fragmented and cannot command a premium (like SHL stake in AAIC can).





[/quote]

24AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Thu Mar 14, 2013 8:45 pm

knockknobbler


Manager - Equity Analytics
Manager - Equity Analytics
@The Alchemist wrote:
@knockknobbler wrote:
@The Alchemist wrote:
@knockknobbler wrote:
@Gaja wrote:[quote="knockknobbler"
[color=green]
[color=red]
[/quote]

Accepted........, Your reasoning seems logical and sensible.
One thing I didn't realize is .... even at a particular level of demand/ supply equilibrium, the price may vary based on quantity demanded /supplied.

Thanks......, it's a pleasure to engage in a discussion at this level of vigour and intensity.

25AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Thu Mar 14, 2013 11:48 pm

Gaja


Associate Director - Equity Analytics
Associate Director - Equity Analytics
@knockknobbler wrote:
@The Alchemist wrote:
@knockknobbler wrote:
@The Alchemist wrote:
@knockknobbler wrote:
@Gaja wrote:[quote="knockknobbler"
[color=green]
[color=red]

Accepted........, Your reasoning seems logical and sensible.
One thing I didn't realize is .... even at a particular level of demand/ supply equilibrium, the price may vary based on quantity demanded /supplied.

Thanks......, it's a pleasure to engage in a discussion at this level of vigour and intensity. [/quote]

Friend for general transactions the price is decided by the demand & supply, but as a minority shareholder if u have a considerable block minority shareholders also can sell his or her stake at premium, if am not mistaken Mr. R.F.T. Perera sold his stake in Glass to EPF last April.

Also do u thing the major shareholder will sell 38% stake, if the minority shareholders have more than 13%, unless the major shareholder wanted to get out from the company, i don't think he will do that

26AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Fri Mar 15, 2013 12:04 am

rainmaker


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
You guys didn't read my post properly.

Read page 120 of the annual report very carefully. Read the last point. It is a letter from an independent source not marketing gloss.


After that read the below.

- market cap is 2.9 B
- there is some equity already
- plus the above point which .......

No insurer publishes the 3rd point. They just say LAT is passed. Pathirage published it for a reason

27AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Fri Mar 15, 2013 7:36 am

knockknobbler


Manager - Equity Analytics
Manager - Equity Analytics
@Gaja wrote:
@knockknobbler wrote:
@The Alchemist wrote:
@knockknobbler wrote:
@The Alchemist wrote:
@knockknobbler wrote:
@Gaja wrote:[quote="knockknobbler"
[color=green]
[color=red]
Friend for general transactions the price is decided by the demand & supply, but as a minority shareholder if u have a considerable block minority shareholders also can sell his or her stake at premium, if am not mistaken Mr. R.F.T. Perera sold his stake in Glass to EPF last April.
Yes, I agree.
As Alchemist proved, theoretically also, it is not contrary to the market mechanism.

Also do u thing the major shareholder will sell 38% stake, if the minority shareholders have more than 13%, unless the major shareholder wanted to get out from the company, i don't think he will do that
From the face of it, your argument seems logical. We expect, he will not dispose more than 36%, initially ( unless he can sell entire 87%).
But....,is it essential to hold 51%, to have management control?
I think it depends on the level of maturity of the market. What I heard is ... most of these high-tech start ups (in US ), even after they are listed, were entirely controlled/managed by the founder successfully for considerable periods, without owning 51%.

28AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Fri Mar 15, 2013 8:35 am

The Alchemist


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@rainmaker wrote:You guys didn't read my post properly.

Read page 120 of the annual report very carefully. Read the last point. It is a letter from an independent source not marketing gloss.


After that read the below.

- market cap is 2.9 B
- there is some equity already
- plus the above point which .......

No insurer publishes the 3rd point. They just say LAT is passed. Pathirage published it for a reason

@ Rainmaker - I read page 120 as you said. then i re read your above point. I still dont understand what point your trying to make. Please explain clearly.

29AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Fri Mar 15, 2013 8:47 am

Gaja


Associate Director - Equity Analytics
Associate Director - Equity Analytics
@knockknobbler wrote:
@Gaja wrote:
@knockknobbler wrote:
@The Alchemist wrote:
@knockknobbler wrote:
@The Alchemist wrote:
@knockknobbler wrote:
@Gaja wrote:[quote="knockknobbler"
[color=green]
[color=red]
Friend for general transactions the price is decided by the demand & supply, but as a minority shareholder if u have a considerable block minority shareholders also can sell his or her stake at premium, if am not mistaken Mr. R.F.T. Perera sold his stake in Glass to EPF last April.
Yes, I agree.
As Alchemist proved, theoretically also, it is not contrary to the market mechanism.

Also do u thing the major shareholder will sell 38% stake, if the minority shareholders have more than 13%, unless the major shareholder wanted to get out from the company, i don't think he will do that
From the face of it, your argument seems logical. We expect, he will not dispose more than 36%, initially ( unless he can sell entire 87%).
But....,is it essential to hold 51%, to have management control?
I think it depends on the level of maturity of the market. What I heard is ... most of these high-tech start ups (in US ), even after they are listed, were entirely controlled/managed by the founder successfully for considerable periods, without owning 51%.

Even in SL there are companies run without single or related parties hold more than 51%

Also if you have more than 25% as single investor, you can sometimes asked for the premium price, because some of the decisions needed 75% voting, i think NHL got a good deal on GHLL due to this advantage.

30AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Fri Mar 15, 2013 8:53 am

rainmaker


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
I'm not an insurance expert but I was told the following about JINS and others.

Where does the profit of a life insurer come from? A transfer to shareholder fund


Why transfer? Because you hold excess assets

Read the LAT report about assets held to protect policyholders. Did you read point 4 about the fair value of the liability?

31AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Fri Mar 15, 2013 10:00 am

The Alchemist


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
@rainmaker wrote: I'm not an insurance expert but I was told the following about JINS and others.

Where does the profit of a life insurer come from? A transfer to shareholder fund


Why transfer? Because you hold excess assets

Read the LAT report about assets held to protect policyholders. Did you read point 4 about the fair value of the liability?

@ Rainmaker - Life Insurance 101 - When Life Insurance is sold, the Premium Income is invested and Income accrues to settle future claims arising from Life Insurance Policies. Every year, this Life Fund Assets (Investments) and Liabilities (Future claims) are valued by an actuary based on various characteristics such as life expectancy and income to fund etc. After this is done, a Surplus or Deficit of Funds position is determined. The important thing to note here is even when their is a surplus (generally in this case and most cases), the surplus does not belong to the shareholders of the Insurance company but the Life Policyholders of the Insurance Company and they are compensated through Bonuses. A prudent amount (in this case approx Rs 150 million) of the surplus over Assets and actuarially determined liabilities accrues to the shareholders and is transferred to Income statement. This is how AAIC even made a profit in 2012. without a life fund transfer, they would have made a loss as their non-life division did.

32AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Fri Mar 15, 2013 10:11 am

Slstock

Slstock
Director - Equity Analytics
Director - Equity Analytics
Lasith,

Did you get more info than you needed so far Wink ?
@lasithfernando wrote:Hey guys, I'm pretty new to the forum. This is my first post actually.

Just a query I have:

I read that 38% of Asian Alliance Insurance was bought by two foreign investment firms for an agreed price of 128 Rupees a share. Doesn't that mean that the stock's intrinsic value should be around that figure if not higher? And if so shouldn't the market price eventually reflect that value?

Your opinions would be highly appreciated

Cheers

33AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Fri Mar 15, 2013 10:14 am

rainmaker


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
Alchemist I agree with you. But they are having a provision for liabilities of 2.9B. The fair value of liabilities is 897M.


That's a big difference. Surely some of it can be passed on to the shareholder. May that is the intrinsic value?

34AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Fri Mar 15, 2013 10:17 am

rainmaker


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
How come other companies distribute high amounts.... JINS CINS SLIC to the shareholders?

35AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Fri Mar 15, 2013 11:00 am

The Alchemist


Senior Manager - Equity Analytics
Senior Manager - Equity Analytics
[quote="rainmaker"]Alchemist I agree with you. But they are having a provision for liabilities of 2.9B. The fair value of liabilities is 897M.

That's a big difference. Surely some of it can be passed on to the shareholder. May that is the intrinsic value? [/quote

from 2012 Annual Report -

page 120 note 4. Un-audited balance sheet assets of SLRs 3,396.6 million are sufficiently adequate as compared to the discounted cash flow reserves of SLRs 806.4 million and in contrast to un-audited balance sheet reserves of SLRs 2,904.3 Mill

page 150 note 11. Insurance Liabilities Life
The valuation of the long term Insurance business, as at 31.12.2012, was made by Mr. M. Poopalanathan, AIA of Actuarial & Management Consultants (Pvt) Ltd. for and on behalf of Asian Alliance Insurance PLC.
In accordance with the Consultant Actuary’s Report, the sum of provision, Rs. 2,904 Mn includes the liability inrespect of Policy holders’ bonus as well. In the opinion of the Consultant Actuary, the provision is adequate to cover the liabilities pertaining to long term Insurance.
In establishing the valuation, a reserve of Rs. 5.83 Mn has been created for the purpose of any future bonus and contingencies by the Actuary.
Actuary recommended to transfer Rs.155.8 Mn to Share holders.

page 38 - Life Operating Surplus
Over the past few years, the Life operating surplus has been
growing significantly due to high policy value, retention rates,
prudent management of insurance claims, surrenders, expenses and
the return on investment in the Life segment. During the period
under review, the Company recorded a Life operating surplus of
Rs.707 Mn, which is a growth of 13% compared to the previous year.

(Rs '000') 2008 2009 2010 2011 2012
Life Operating Surplus 475,577 551,427 622,567 623,656 707,218
Life Surplus to Shareholders 160,000 195,000 253,610 200,000 155,879

Why do you think that the Fair Value of Liabilities is Rs 897 Million ?
Did you think that their was approx Rs 2 Billion Surplus, this should be considered as intrinsic value although it does not belong to the shareholders of the company ? (only a part does).

























































36AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Fri Mar 15, 2013 11:44 am

rainmaker


Assistant Vice President - Equity Analytics
Assistant Vice President - Equity Analytics
@Alchemist The liability value will be changed by 2015 to be the one used for LAT. There is some new regulations coming in and the new stuff is the same as the IFRS LAT calculation. The current calculation that the local guy is doing is based on an old technique that provides very very conservative results.

If you know the insurance industry well you will know what I'm talking about. I believe that this may be a reason for the new interest in insurance.

37AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Fri Mar 15, 2013 3:13 pm

lasithfernando


Stock Trader
@slstock wrote:Lasith,

Did you get more info than you needed so far Wink ?
@lasithfernando wrote:Hey guys, I'm pretty new to the forum. This is my first post actually.

Just a query I have:

I read that 38% of Asian Alliance Insurance was bought by two foreign investment firms for an agreed price of 128 Rupees a share. Doesn't that mean that the stock's intrinsic value should be around that figure if not higher? And if so shouldn't the market price eventually reflect that value?

Your opinions would be highly appreciated

Cheers

Oh yeah :p

38AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Fri Mar 15, 2013 3:15 pm

lasithfernando


Stock Trader
I noticed a slight upward movement today with AAIC and a slightly higher number of bids than the last couple of days.

I guess it all comes down to this analogy:

If someone's willing to pay 120 rupees for a coconut that's selling at 80 rupees, the market has to decide over time if the coconut is worth 80 or 120 according to its own demand and supply

39AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Fri Mar 15, 2013 3:52 pm

Slstock

Slstock
Director - Equity Analytics
Director - Equity Analytics
You got it.

@lasithfernando wrote:I noticed a slight upward movement today with AAIC and a slightly higher number of bids than the last couple of days.

I guess it all comes down to this analogy:

If someone's willing to pay 120 rupees for a coconut that's selling at 80 rupees, the market has to decide over time if the coconut is worth 80 or 120 according to its own demand and supply

40AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Wed Mar 20, 2013 11:35 am

Gaja


Associate Director - Equity Analytics
Associate Director - Equity Analytics
http://www.cse.lk/cmt/upload_cse_announcements/4211363755220_.pdf

41AAIC Intrinsic Value - Page 2 Empty Re: AAIC Intrinsic Value Fri May 03, 2013 11:33 am

Gaja


Associate Director - Equity Analytics
Associate Director - Equity Analytics
Some interest today

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