Insurance Australia Group Limited

IAG Details

Change in Shareholding: Insurance Australia Group Limited (ASX: IAG) sells general insurance under various brands operating in Australia & New Zealand. In Australia, IAG operates in two divisions: Direct Insurance Australia (DIA) and Intermediated Insurance Australia (IIA). On 2 November 2021, Director, David Armstrong held 45,650 ordinary shares in IAG via an on-market purchase of 10,650 shares. On 3 November 2021, Perpetual Limited and its related entities held ~5.02% voting shares and became a substantial holder in IAG.

Business Update & FY22 Guidance:

• IAG reported ~14,000 claims on 1 November due to a recent hail and storm activity in October 2021. It estimates ~$169 million net costs of the calamity and expects the claims to increase further in the coming days.
• Accordingly, IAG raised its expectation of net natural perils claims costs to ~$1,045 million for FY22 versus previously estimated ~$765 million. On a YTDFY22 basis, IAG estimates ~$535 million net natural perils claim costs, up by ~$280 million from the previous estimate.
• Consequently, IAG narrowed the previously stated insurance margin guidance range from 13.5 - 15.5% to 10.0 - 12.0% for FY22.

Update on ASIC Proceedings

• On 15 October 2021, IAG reported the start of civil penalty proceedings by the Australian Securities and Investments Commission (ASIC) against its 100% subsidiary IAL (Insurance Australia Limited) in the Federal Court. Allegedly, IAL did not pass on the full discount to several NRMA Home, Caravan, Boat, and Motor insurance customers from March 2014-September 2019. In 2019, IAG, self-reported the issue and has been working on a remediation program with AISC.

FY21 Result Highlights:

• The company posted robust underlying performance with gross written premium (GWP) increased to ~$12,602 million, up by ~3.8% YoY in FY21.
• The cash earnings increased from ~$279 million in FY20 to ~$747 million in FY21.
• The company declared 13 cents per share final dividend, taking the FY21 dividend to 20 cps.
• The net loss after tax amounted to ~$427 million in FY21 impacted by pre-tax provisions due to COVID-19, customer refunds, the settlement of the Swann Insurance Class Action, and payroll compliance.

Total Revenue & Net Income Trend from FY15-FY21; (Analysis by Kalkine Group)

Key Risks: The company faces insurance risks due to insufficient underwriting and/or inappropriate product pricing. A reduction in volumes in the reinsurance market poses a high reinsurance risk. Risk of default from premium debtors increases due to the COVID-19 crisis, natural calamities, and other macro events.

Outlook:

• IAG now expects insurance margin between ~10.0 - ~12.0% instead of ~13.5 - ~15.5% stated previously for FY22.
• Gross Written Premium (GWP) is expected to grow by low single-digit growth in FY22 due to moderate growth in customers, rate increases in short-tail personal lines and, across commercial lines in the IIA division.
• In the mid-term, IAG aims to achieve ~15%-17% insurance margin and atleast ~$250 million insurance profit for the IIA division. It aims to simply cost structure further and drive efficiencies in the next three (3) years.

Valuation Methodology: Price to Book Value Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of IAG gave a negative return of ~16.07% in the past month and a negative return of ~12.64% in the past three months. The stock is currently trading lower than the 52-weeks’ average price level band of $4.300 - $5.510. The stock has been valued using the Price to Book Value multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount than its peers’ average P/BV multiple, considering its net loss position, the debt-to-equity ratio in FY21, narrowed FY22 guidance of insurance margin, and higher estimated net natural perils claim costs for FY22, continued uncertainty due to COVID-19 & natural perils. For this purpose of valuation, few peers like QBE Insurance Group Limited (ASX: QBE), Suncorp Group Limited (ASX: SUN), Steadfast Group Limited (ASX: SDF), and others have been considered. Considering low trading levels, increase in gross written premium, cash earnings, reported insurance profit in FY21, and valuation upside, and expected growth in GWP, we give a ‘Buy’ rating on the stock at the closing market price of $4.490, down by 1.966%, as of 10 November 2021.

IAG Daily Technical Chart, Data Source: REFINITIV  

IOOF Holdings Limited

IFL Details

Substantial Shareholders: IOOF Holdings Limited (ASX: IFL) provides wealth management services to advisers and its clients. It operates the Financial Advice segment, provides Portfolio & Estate Administration services to the clients of its advisers, and undertakes Investment Management. On 28 October 2021, Mitsubishi UFJ Financial Group, Inc. and First Sentier Investors Holdings Pty Limited became substantial shareholders in IFL with ~5.15% and ~5.11% voting shares.

Q1FY22 Highlights: 

• IFL posted an increase of ~$2.4 billion in FUMA to ~$321.1 billion in Q1FY22 due to the growth of FUA (Funds Under Administration) by ~$1.8 billion and Funds Under Management (FUM) by ~$0.6 billion.
• In the Advice segment, IFL reported a decrease in the number of practices in the self-employed channel by 37 to ~539 in the quarter. The company reported ~1,883 advisers in Q1FY22, down by 65.
• The company is progressing with its transformation program, platform & operating model simplification, and is in the process of estimating incremental synergies from these changes.
• IFL reports that Q1FY22 results are in line with expectations and the business is witnessing early growth momentum post the MLC acquisition and with the ongoing transformation program.

FUMA Growth Highlights; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of business integration, accrual of cost synergies, technological changes, and COVID-19 uncertainty. It continues to face investment risk, market volatility, and regulatory changes.

Outlook:

• The company plans to rebrand from IOOF Holdings Ltd to Insignia Financial Limited to better align with its goals. The rebranding is subject to shareholder approval at the Annual General Meeting (AGM) to be held on 25 November 2021.
• IFL estimates corporate rebranding will cost ~$2-3 million and plans to finance through its current transformation and integration budget. IFL targets the delivery of Phase II of the Evolve21 consolidation in December 2021.
• IFL is on track to deliver a synergy run-rate of ~$80-100 million for FY22 and targets ~$218 million per year before-tax synergy run rate from the MLC acquisition by FY24-End.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of IFL gave a negative return of ~17.44% in the past three months and a positive return of ~11.96% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of ~$3.050 - ~$5.390. The stock has been valued using the P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ average P/E multiple, considering its net loss in FY21, expected additional transformation & integration costs, rebranding cost, in FY22, and risk of achieving synergies & successful integration. For this purpose of valuation, few peers like Perpetual Limited (ASX: PPT), Platinum Asset Management Limited (ASX: PTM), Pendal Group Limited (ASX: PDL), and others have been considered. Considering the low trading levels, in line results in Q1FY22, increase in FUMA, on-track transformation, ongoing Evolve21 platform consolidation, cost synergies expected in FY22 & beyond, upside in valuation, we give a ‘Buy’ rating on the stock at the current market price of $3.875, as of 10 November 2021, 2:10 PM (GMT+10), Sydney, Eastern Australia.

IFL Daily Technical Chart, Data Source: REFINITIV  

Liberty Financial Group Limited

LFG Details

Upcoming AGM: Liberty Financial Group Limited (ASX: LFG) is a financial services firm providing investments in specialty lending, insurance brokering, real estate, and others in Australia and New Zealand. LFG operates Residential Finance, Financial Services, and Secured Finance segments. The company will hold a virtual AGM (Annual General Meeting) of shareholders on 17 November 2021.

FY21 Key Results:

• LFG reported ~$4.1 billion in new loan originations by borrowers, up by ~17% YoY in FY21.
• The NIM (net interest margin) rose by ~43 basis points (bps) to ~$3.08% in FY21.
• In FY21, LFG reduced its cost-income ratio to ~22.8%, down by 190 bps, and delivered an ~1.9% underlying return on assets, up by 70 bps.
• The net revenue growth of ~18% exceeded the underlying operating cost growth of ~9% during the year.
• LFG raised ~$4.9 billion capital, thereby strengthening its liquidity position while exiting from FY21.

 Net Income from FY19-FY21; (Analysis by Kalkine Group)

Key Risks:  The company faces continued uncertainty due to COVID-19, forex rate changes, interest rate sensitivity, and demand for the loan from borrowers.

Outlook:

• The company plans to increase profitability by focusing on its disciplines of Customer Experiences, Customer Choice, and Risk-Adjusted Returns.
• LFG is witnessing low-interest scenarios and overall economic indicators facilitating credit growth. The company expects a decline in borrowing costs to aid net interest margin (NIM).
• It plans to roll out expanded auto finance solutions and invest in enhancing customer
• LFG intends to its distribution pay-out at ~40% -~80% of net profit after tax.

Valuation Methodology: Price to Book Value Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: The stock of LFG gave a negative return of ~20.68% in the past three months and a negative return of ~19.01% in the past six months. The stock is currently approaching its 52-weeks’ low level of ~$5.720. The stock has been valued using the Price to Book Value multiple-based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount than its peers’ average P/BV multiple, considering its decline in interest income on financial assets, increase in debt, & operating costs in FY21, continued uncertainty due to COVID-19, & credit risk on lending. For this purpose of valuation, few peers like Resimac Group Limited (ASX: RMC), Australian Finance Group Ltd (ASX: AFG), Pepper Money Limited (ASX: PPM), and others have been considered. Considering the current trading levels, decent financial results in FY21, supportive fundamentals for lending growth, the planned expansion of auto finance solutions, valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $5.720, as of 10 November 2021, 2:13 PM (GMT+10), Sydney, Eastern Australia.

LFG Daily Technical Chart, Data Source: REFINITIV  

Note, the purple color, green and blue line at the bottom of the charts indicates RSI (14-day period).

Note 1: The reference data in this report has been partly sourced from REFINITIV.  

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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