Stocks’ Details
QBE Insurance Group Limited (ASX: QBE)
Unfavourable position: QBE Insurance Group was seen to move up about 4.9% in last five days (as at January 24, 2018) despite the release of a weak trading update wherein a $US1.2 billion ($1.5 billion) full-year loss for FY17 has been indicated as a result of FY17 challenges including impact from various catastrophic events. The combined operating ratio (COR) guidance has also been lowered to 104% against the target range of 100 to 102% (level >100% indicates for an unprofitable underwriting business). Though the 2018 outlook includes a target COR range of 95-97.5% with target net investment return of 2.5-3%, QBE has highlighted many inadequacies in the near term.
The reduction in the US corporate tax rate to 21% is flagged to result in a $230m write down of the carrying value of deferred tax assets in its North American Operations. It has revised assumptions used to support the carrying value of North American goodwill leading to an impairment charge of around $700m. The group’s FY17 combined commission and expense ratio is expected to be around 32.5% while net investment return is estimated to be around 3.2% or $800m. Given the group’s underperforming businesses, QBE now plans to undertake a comprehensive program of work to improve both the level and consistency of performance along with a strategic review of Latin American Operations. These plans might unearth additional write-downs/ expenses to achieve the strategic goals. Given the scenario, we believe the stock is still “Expensive” at the current price of $10.94, and it would be better to look for other alternates including the below stock.
Woolworths Group Limited (ASX: WOW)
Tracking well on priorities for 2018: Woolworths Group recently announced few changes in the Board entailing Steve Donohue’s appointment as the New Managing Director of Endeavour Drinks. The group is tracking in line with its 3-5 years’ plan to improve value across customer, team and supplier experience. The group also upgraded store experience and completed 72 Renewals and 85 Light Upgrades in Woolworths Supermarkets during FY17 and sold out EziBuy and Home Improvement for sketching a better portfolio picture. It is worth noting that the dividend increased by 9.1% at the back of strong cash flow generation during the year and improved trading performance in the second half. The momentum has continued in the first quarter of FY18 on strategic priorities in all the businesses. Focus on digital arm, piloting of Express Delivery and improved customer satisfaction seem to provide good thrust. While the group expects more investment for New Zealand Food in 2018 and highlights improvement needs of BIG W, Australia Food and Endeavour Drinks are tracking well. Further, Woolworths’ record of strong like-for-like sales growth is expected to help the margin expansion.
Meanwhile, WOW that currently operates over 531 sites and has 12 sites in development, was taken aback by ACCC’s decision opposing the proposed acquisition of the Woolworths fuels business by BP, which supplies fuel to approximately 1400 BP-branded service stations throughout Australia. The determination that WOW is a vigorous and an effective competitor having an important influence on fuel prices and on price cycles in many markets throughout the country, overweighed other acquisition prospects. Another blow to the group has been that IMF Bentham is not proceeding with conditional funding of shareholder class action against WOW.
Meanwhile, the stock prices increased by 7.6% in the past three months (as at January 24, 2018). Given the company-wide efforts and targets set for the upcoming year while some temporary headwinds prevail, we have a “Buy” recommendation on the stock at the current price of $27.09
Quarterly Sales (Source: Company Reports)
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