Insurance Australia Group Limited (IAG)
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The company underwrites different types of personal and commercial insurance in Australia, New Zealand and Asia. It writes policies for automotive, home owner, commercial property, construction and engineering, consumer credit, extended warranty, income protection, marine, professional indemnity and workers’ compensation, as well as niche and specialty products. The Warren Buffett investment vehicle Berkshire Hathaway recently took an equity stake of 3.7% in the company and reinsured 20% of its liabilities meaning that it assumed the risk on these policies in exchange for a fee. Buffett said that though the contract runs for 10 years, he expects for decades and decades to come that both companies will benefit in many ways that he couldn't even visualise now.
Dividend Numbers (Source - Company Reports)
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The company posted an EPS increase of 47% last year but investors should keep in mind that in the insurance business, earnings can be volatile because it is next to impossible to predict the claims that may need to be paid out in any year. The company has a very sound balance sheet and the interest coverage is around 18 times the operating earnings. Buffett is famous for carrying out the most comprehensive due diligence and we can be reasonably sure that there are no nasty surprises down the line. The stock trades at a discount to the wider insurance sector and provides an attractive fully franked dividend yield in excess of 5%. However, the dividend is likely to remain flat next year because earnings are set to drop marginally.
IAG Daily Chart (Source - Thomson Reuters)
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The insurance market in Australia is becoming much more competitive and, as a result, the company is looking to spread its wings in Asia for future growth. This is a wise move because it provides diversification while simultaneously providing increased exposure to a region where the demand for financial products is growing fast. Buffett's move in a sense, in a sense,, may be considered a bolstering of his move into Asia and Asian insurance. The deal also provides him with a foothold in the Australian $ 11.5 billion general insurance market amidst the scramble by other global firms to establish a foothold in Australia and Asia.Berkshire Hathaway, which has long been a major presence in US insurance, already has an Asian presence through Gen Re its reinsurance arm as well as a speciality insurance arm which began operating in Hong Kong in January and, in April, secured and insurance license to operate in Sydney.
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The company said the deal would help reduce volatility in its own earnings and help with its capital needs. Its core businesses are in Australia and New Zealand but it has recently obtained a license in Indonesia and is looking to make an entry into the Chinese insurance market. It is also looking to boost its stake in its joint venture in India. We believe that the stock is cheap at its current P/E ratio and that Buffett's investment provides an impeccable pedigree besides providing an attractive dividend yield. We would definitely rate this stock as a Buy.
Automotive Group Holdings Ltd (AHG)
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The Perth-based group is the largest automotive dealer in the country as well as its largest refrigerated logistics provider. The company has actively pursued a strategy of acting as an aggregator in what is essentially a somewhat fragmented industry.This was demonstrated by its recent acquisition of Bradstreet Motor Group and three Mercedes Benz passenger and van dealerships in Perth. This strategy has helped it to generate attractive returns for shareholders over the last six years and that trend looks set to continue into the future after the announcement of its latest results.
Dividend Numbers (Source - Thomson Reuetrs)
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The company shares jumped by more than 5% on the announcement of its results for FY 2015 showing a record operating profit and announcing an increased dividend. Group revenues grew by 10.8% to $ 5.2 billion, IFRS statutory profit before tax was up 20.5% to hit $ 130 million and IFRS statutory profit after tax was up 20.8% at $ 88.1 million. The record operating profit before tax was up 20.5% to $ 141.7 million and the record operating profit after tax by 20% to $ 90.2 million. Operating EPS grew by 6% to 30.7 cents per share and the final dividend was 13 cents per share making a fully franked final dividend of 22 cents per share compared to 21 cents per share in the previous year. The acquisitions completed in FY 2015 are Bradstreet Motor Group, Leo Muller CID and Paceway Mitsubishi. Automotive reported a record performance while the improvement in the results of Refrigerated Logistics was because of the full-year contribution from Scotts/JAT. Operating earnings before interest, tax, depreciation and amortisation (EBITDA) rose 20.8% to $215.8 million.
AHG Daily Chart (Source - Thomson Reuters)
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Much of the growth came from the core Automotive Retail division which reported a 10% rise in revenues and a 21.7% growth in operating EBITDA. It described its performance in New South Wales as “outstanding”, while it also recorded improved performances in Queensland, Victoria, New Zealand and Western Australia.The Refrigerated Logistics division also pitched in with an impressive 41.7% growth in revenues and a 52.2% increase in operating EBITDA to $45.2 million, thanks to an improved EBITDA margin of 7.4% compared to 6.9% in the previous year.Unfortunately, the group’s “Other Logistics” segment didn’t perform as well and revenues declined by 13.3% to $365.2 million while operating EBITDA fell 38.6% to $10.5 million. The operating EBITDA margin was just 2.9%, down from 4.1% in the previous year.
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With more than $ 60 million of cash on hand, the group is in a strong position to continue its growth organically as well as with the help of new acquisitions. It continues to remain focused on its core strategies with ongoing investment in the appropriate business acquisitions, the continued divestments of non-core assets at the right moment and review of underperforming businesses at periodic intervals. The dividend yield in excess of 5% is attractive in the context of the current low return environment and we think that investors looking for growth as well as income should be well advised to consider the stock seriously. We would rate the stock as a Buy.
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