I. Sector Landscape
Globally, the financial services segment has remained resilient from the ongoing obstructions of the Russia-Ukraine geopolitical unrest. Aided by expansionary monetary and fiscal policies, output has resurged in most economies, especially those with the most progressive vaccination rollout programs. Households have continued to increase financial buffers, indicated by the high saving rate. Furthermore, businesses have maintained sound lending standards in the face of increasing the debt-to-income ratio.
Authorised Deposit-taking Institutions (ADIs) Holding Decent Financial Position
Improved Total Residents Assets: In March 2022, the total residents assets surged by $34.2 billion, primarily driven by increased loans and finance leases. Total securitised assets slipped by $4.0 billion or 0.5% on the balance sheet. Cash and deposits with ADIs, including RBA exchange settlement account balances, advanced by $5.9 billion or 1.3%.
Managed Funds and Insurance Industry Seeking Growth Prospects
Key Statistics on Managed Funds: The managed funds industry advanced by $86.1 billion or 2.0% to clock funds under management at $4,476.6 billion. The consolidated assets of managed funds institutions edged up by $89.1 billion or 2.5% to $3,604.6 billion. Additionally, cross-invested and unconsolidated assets increased by $24.0 billion or 4.2% and $113.1 billion or 2.8%.
Index Performance
The ASX 200 Financials (GIC) posted two years return of ~+49.71%, compared to ~+22.94% by the ASX 200 Index. Increasing consumer spending, surged housing demand, decent investment avenues, improved net flows, and resilient economic parameters sought by the RBA have contributed to the sector's growth.
Figure 4: The ASX 200 Financials (GIC) outperformed the ASX 200 Index in the past two years by ~26.77%:
Source: REFINITIV as of 26 May 2022
Key Risks and Challenges
Total unconsolidated assets of the life insurance industry slipped by $2.7 billion or 2.1% to $126 billion during December 2021 quarter. The RBA may get involved in continuous interest rate tweaks to combat inflationary pressures. Total dwelling unit commencements slipped by 13.5% in December 2021 quarter, potentially affecting new loan commitments. The investment loss stood at $942 million in FY22 for the general insurance industry, primarily attributed to losses on interest-bearing investments amid sharp uplift in bond yields.
Outlook
Improved Macroeconomic Conditions: The Australian economy advanced by 3.4% on a seasonally adjusted basis. Real net national disposable income surged by 1.7%, and the household saving ratio slipped to 13.6% from 19.8%.
Increased Liquidity from Total Residents Deposits: Total residents deposits advanced by $23.8 billion or 0.9% in March 2022, driven mainly by household deposits that edged up by $17.7 billion or 1.4%, continuing the growth trend of household savings.
Increased Lending to Non-Financial Businesses: Loans and finance leases to non-financial businesses surged by $10.9 billion or 1.3% in March 2022, while credit card lending slipped by $0.1 billion or 0.3%.
Improved Statistics on General Insurance: Gross claims expense and underwriting results increased to $44.6 billion (+7.3%) and $4.7 billion (+204.4%). Improved results reflect the impact of premium surge across specific classes of business.
Improved Superannuation Funds Statistics: Total unconsolidated assets of superannuation funds increased by $93.4 billion or 2.7% to $3,524.1 billion during the December 2021 quarter.
II. Investment theme and stocks under discussion (GQG, JDO, NHF)
After understanding the sector, let us now look at three companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘Price/Book Value’ multiple method.
1. ASX: GQG (GQG Partners Inc)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$4.73 billion)
GQG is a global boutique asset management company focusing on active equity portfolios.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 17.03% on 26 May 2022. Moreover, the stock might trade at a slight premium compared to its peers, given the resilient fund management and a significant jump in top-line. For valuation, peers such as Netwealth Group Ltd (ASX: NWL), OFX Group Ltd (ASX: OFX), Pinnacle Investment Management Group Ltd (ASX: PNI), and others are considered. Given the favourable financial update, resilience towards market volatility, favourable financial position, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $1.600, down by ~0.311% on 26 May 2022. In addition, the stock has delivered an annualised dividend yield of 2.13%.
GQG Daily Technical Chart (Data Source: REFINITIV)
2. ASX: JDO (Judo Capital Holdings Limited)
(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$1.95 billion)
JDO is an Australian company with multiple banking products and services for small and medium-sized businesses in Australia.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 17.56% on 26 May 2022. Moreover, the stock might trade at a slight premium compared to its peers, given half-yearly financials exceeding full-year guidance. For valuation, peers such as Commonwealth Bank of Australia (ASX: CBA), National Australia Bank Ltd (ASX: NAB), Australia and New Zealand Banking Group Ltd (ASX: ANZ), and others are considered. Given the decent financial status, favourable liquidity levels, balanced provisioning, current trading levels, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $1.820, up by ~2.824% on 26 May 2022.
JDO Daily Technical Chart (Data Source: REFINITIV)
3. ASX: NHF (NBI Holdings Limited)
(Recommendation: Hold, Potential Upside: High Single-Digit, Mcap: A$3.40 billion)
NHF is a private health insurer in Australia and New Zealand. Through its Travel business segment, the company offers the sale and distribution of travel insurance policies across the world.
Valuation
The illustrative valuation model suggests that the stock has a potential upside of 8.04% on 26 May 2022. Moreover, the stock might trade at a slight premium compared to its peers, given the projected recovery in global markets and Priceline partnership commencement. For valuation, peers such as Generation Development Group Ltd (ASX: GDG), Medibank Private Ltd (ASX: MPL), PSC Insurance Group Ltd (ASX: PSI), and others are considered. Given the policyholder growth, improved premium, controlled expenses, current trading levels, and upside indicated by valuation, we give a “Hold” recommendation on the stock at the closing market price of $7.270, down by ~2.021% on 26 May 2022. In addition, the stock has delivered an annualised dividend yield of 3.36%.
NHF Daily Technical Chart (Data Source: REFINITIV)
Comparative Price Chart:
Source: REFINITIV
Markets are trading in a highly volatile zone currently due to certain macroeconomic issues and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing.
Note: All the recommendations and the calculations are based on the closing price of 26 May 2022. The financial information has been retrieved from the respective company’s website and REFINITIV.
Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the valuation has been achieved and is subject to the aforementioned factors.
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