FCMB: Planned Acquisition of AIICO Pension Portends Long Term Value
FCMB group proposed acquisition of AIICO Pension is positive for long term value but could dilute shareholders return by about 26% in the short term, says analysts at Chapel Hill Denham Limited, an investment banking firm.
In its research note led by its analysts Aderonke Akinsola CFA and Tajudeen Ibrahim, Chapel Hill Denham Limited said the acquisition of AIICO Pensions will further support increased contribution of the Pensions subsidiary to the Group’s fee income and earnings.
Albeit, amid the possibility of slower organic assets under management (AUM) growth follows negative 1.9% year to date as at first quarter of 2020, on weaker macro and market conditions.
FCMB Group disclosed the planned acquisition of AIICO Pensions by its pension subsidiary, FCMB Pensions Limited.
The group said it plans to acquire the 70% stake held by AIICO Insurance and the 26% held by some other shareholders in AIICO Pensions.
This was disclosed in a notification to the NSE and the proposed transaction, which will make AIICO Pensions an indirect subsidiary of FCMB Group, is subject to regulatory approvals.
Chapel Hill Denham noted that the proposed acquisition is in line with management’s recent disclosure on exploring inorganic opportunities to support growth in assets under management.
More so, the group had estimated AUM growth guidance of over 15% for financial year 2020.
FCMB Pensions had asset under management (AUM) of about ₦325 billion as at Q1-20 while AIICO Pensions’ AUM is estimated to be about ₦126 billion.
This implies a combined AUM of about ₦451 billion which translates to +39% uptick relative to pre-acquisition, if the transaction is completed in 2020.
Analysts recall that FCMB increased its stake in Legacy Pensions – now FCMB Pensions – to 91.6% in 2019 and now has full control of the business.
Post-acquisition, Chapel Hill Denham estimates that FCMB Pensions will emerge as the 6th or 7th largest pension fund manager by AUMs, up from 10th currently.
“We also see the proposed divestments as beneficial for AIICO Insurance as it further supports the insurer’s capital position.
“Also, the insurance company’s ability to take more risks amid the ongoing recapitalisation exercise in the industry”, analysts stated.
Recalled that AIICO insurance recently sought the NSE’s approval listing of a rights issue worth about ₦3.5 billion to boost its capital.
Analysts said that AIICO is the second insurance company in recent times that has indicated plans to exit from non-insurance businesses.
In February 2020, AXA Mansard disclosed plans to divest its pension fund management and real estate businesses.
However, the firm believes that FCMB’s proposed acquisition enhances the long-term value of the Group.
Then, it attributes this to the prospects of the pensions industry from an AUM growth standpoint, the immediate impact on FCMB Pensions could be return dilutive for shareholders.
“By our estimate, the return on average equity (ROAE) of the bigger FCMB Pensions will likely decline by about 26%, post business combination”, analysts said.
In 2019, FCMB Pension ROAE was 34.1% compare to 11.2% for AIICO Pensions.
However, Chapel Hill Denham said it sees potential cost synergies as an upside to profitability.
“We believe the combined entity will be better positioned for stronger organic AUM growth and fee income contribution to the Group’s performance when the broad macro recovers and over the long term.
“We currently have a HOLD rating on FCMB with a 12-month target price of ₦1.62, implying a total return of -5.5%”, Chapel Hill Denham said.