This article first appeared in The Edge Financial Daily on May 30, 2017 - June 5, 2017

KUALA LUMPUR: MPHB Capital Bhd expects minimal growth this year on contributions from various business segments, but said its financial performance could be affected should the call option on its insurance arm materialise before year-end.

The group in May 2015 sold a 49% stake in subsidiary Multi-Purpose Insurans Bhd (MPIB) to Generali Asia NV for RM355.8 million. Following this, it also granted call and put options to Generali Asia upon the completion of the disposal which entailed an option for the Italian insurer to acquire up to a 21% stake in MPIB.

“There will be very small growth [for the year ended Dec 31, 2017 or FY17] but if the call option materialises before the end of the year, our revenue and profit will be affected as we will only take in 30% for the remaining months,” said chief executive officer Kheoh And Yeng.

“However, there will be a one-off increase in profit with the completion of the call option,” she told reporters after the group’s annual general meeting yesterday.

Though the group has not finalised the sale price, Kheoh said it will be calculated using the same formula as that used in the previous 49% stake sale, with an additional 6% interest per annum.

The 6% interest is levied between the time Generali Asia purchased its 49% stake and the time it exercises its call option.

The segments that are expected to contribute to the group’s financial performance in FY17 are the insurance, credit and hospitality divisions.

For the hospitality division, contributions will come specifically from the Flamingo by the Beach hotel in Penang. Compared with MPHB’s other hotel, Flamingo by the Lake in Ampang, near Kuala Lumpur, which has an occupancy rate of 59%, the Penang hotel’s occupancy rate is 65%.

“[Operating a hotel] in Penang is slightly easier as there are more tourists there. [Whereas in Ampang], there are not many tourists in this part of town and there is stiff competition among hoteliers in Kuala Lumpur,” Kheoh said.

Meanwhile, MPHB anticipates net claims incurred ratio to increase in FY17 due to the weak economy.

For FY16, net claims incurred ratio was higher at 58% compared with 54.8% in FY15, mainly due to adverse claims experienced from several accounts and additional provision of IBNR (incurred but not reported) reserve of RM6.4 million.

“If you look at the current economy, we would probably see higher claims. It’s quite standard when the economy goes down, the claims will go up,” Kheoh said.

MPHB is unsure of the completion date of the stake sale to Generali Asia as the final approval and decision will be made by Bank Negara Malaysia, but said the proceeds from the transaction would be spent prudently.

“We will see how best we can use the cash. We would like to buy something that can give us recurring income but with the current economy, it is not easy to find something that is good,” Kheoh said.

She further explained that while expansion of the property segment has always been on its mind, the challenging property market has been a drag.

“After the stake sale, there will be less revenue recognised from the insurance side. Property is one area which we have always wanted to expand but there are issues such as the oversupply of buildings and buyers not being able to secure loans,” she said.

“It’s best not to rush into it. You may get additional enhancements with [new] properties but having no returns is risky for the group,” she added.