Stocks’ Details

QBE Insurance Group Limited

Growth in Gross Written Premium: QBE Insurance Group Limited (ASX: QBE) is involved in underwriting general insurance and reinsurance risks, management of Lloyd’s syndicates and investment management. During 1HFY20, the renewal rate increase averaged at ~8.7% as compared to 4.7% in 1HFY19. On a constant currency basis and after adjusting for asset sales completed in 2019, the gross written premium increased by around 10% over the half-year period. During Q1FY20, the underlying gross written premium (GWP) amounted to US$4,533 million.

GWP Growth (Source: Company Reports)

Leadership Changes: Recently, the company announced that Mr. Vivek Bhatia, CEO Australia Pacific, has resigned from his position to take a new role with Link Group. The company has appointed Mr. Frank Costigan on the interim role of Managing Director Australia. In addition, Mr. Declan Moore has been given interim responsibility for the AUSPAC division.

Outlook: As of now, QBE is likely to report a combined operating ratio of around 104% in 1H FY20, which indicates COVID-19 impacts of around US$335 million, negative catastrophe experience of ~ US$60 million as well as adverse prior accident year claims development of around US$120 million. For 1H FY20, the company anticipates a statutory net loss after tax of around US$750 million. The company has scheduled to release its 1H FY20 results on 13^th August 2020.

Key Risks: As the company operates in insurance and reinsurance business, it is exposed to a substantial variety of business risks, including strategic, insurance, credit, market, liquidity, operational, compliance risk.

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

P/BV Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of QBE has corrected by 28.64% in the past six months and is trading lower than the average 52 weeks price level band. The company is in a strong capital position against regulatory and rating agency capital requirements. For 1H FY20, the company expects pro forma gearing of around 30%. We have valued the stock using Price to Book Value multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in percentage terms). For the purpose, we have taken peers such as Insurance Australia Group Ltd (ASX: IAG), Suncorp Group Ltd (ASX: SUN), AMP Ltd (ASX: AMP) to name few. Therefore, considering the growth in gross written premium, decent capital position, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $9.940 per share, down by 1.487% on 7^th August 2020.

Insurance Australia Group Limited

A Look at FY20 Results: Insurance Australia Group Limited (ASX: IAG) provides general insurance, which includes a full range of personal and commercial insurance products. The market capitalisation of the company stood at $11.72 billion as on 7^th August 2020. Recently, the company released its FY20 results, wherein it stated that its gross written premium (GWP) amounted to $12,135 million, reflecting a growth of 1.1% over FY19. GWP growth was in line with the company’s guidance, despite a marginal negative effect from COVID-19 during 2H FY20 from lower new business volumes. During FY20, the company withdrew its investments from India and made a post-tax profit of $326 million. The reported margin for the period stood at 10.1%, lower than the guidance of 12.5%-14.5%, mainly due to the higher than expected level of natural peril events.

Key Financials (Source: Company Reports)

Payment of Dividend: The company has decided not to pay a final dividend for FY20. Hence, the full-year dividend for FY20 remained at 10 cents per share, reflecting a cash payout ratio of 82.8%.

Key Risks: The company’s business is exposed to multiple risks relating to its businesses such as market risk, credit risk and liquidity risk. In addition, the business is also sensitive to economic, environmental, and social sustainability risks.

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

P/BV Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: The stock of IAG has corrected by 28.59% in the past six months and is trading close to its 52-week low price, offering a decent opportunity for accumulation. During the last four years, the company was focused on gaining a deeper and better understanding of its customers, delivering a simpler and more streamlined operating platform and developing an agile, adaptable workforce. With its resilient business, the company seems well-positioned to navigate the challenges presented by the current environment. The company is scheduled to conducts 2020 Annual General Meeting on 23^rd October 2020. We have valued the stock using the price to book value multiple based illustrative relative valuation method and arrived at a target price with an upside of lower double-digit (in percentage terms). For the purpose, we have taken peers such as Medibank Private Ltd (ASX: MPL), Steadfast Group Ltd (ASX: SDF), AMP Ltd (ASX: AMP) to name few. Thus, considering the growth in GWP, the company’s resilient business, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $5.030 per share, down by 0.789% on 7^th July 2020.

Bank of Queensland Limited

Capital Management Strategy: Bank of Queensland Limited (ASX: BOQ) provides banking, financial and related services. The market capitalisation of the bank stood at $2.67 billion as on 7^th August 2020. Recently, the bank released Basel III Pillar 3 Disclosures for the quarter ended 31^st May 2020, wherein BOQ stated that its capital management strategy targets to ensure adequate capital levels are maintained to protect deposit holders. BOQ has set the Common Equity Tier 1 Capital target range to be between 9.0% and 9.5% and the Total Capital target is expected in the range of 11.75% and 13.5%. As at 31^st May 2020, Common Equity Tier 1 Capital Ratio stood at 9.8%, and the total capital ratio was 12.7%. During 1H FY20, BOQ reported Cash earnings of $151 million, down 10% on pcp.

Key Financial Metrics (Source: Company Reports)

Growth Aspects: BOQ seems well-capitalised to navigate through the potential downside economic impacts arising from COVID-19. In addition, BOQ possesses enough capital to support its asset growth and transformation agenda. BOQ is expected to release its FY20 earnings on 13^th October 2020.

Key Risks: The bank is mainly exposed to operational risk, which arises from inadequate or failed internal processes, people and systems, or from an external event. The business is also sensitive to credit risk and insurance risk. Credit risk is influenced by the failure of counterparties on their contractual obligations.

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

P/BV Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

Note: All forecasted figures have been taken from Thomson Reuters, NTM: Next Twelve Months 

Stock Recommendation: The stock of BOQ has corrected by 22.94% in the past six months and is currently inclined towards its 52-week low price of $4.510. BOQ seems well-placed to drive through the market volatility on the back of decent liquidity and capital levels prior to market disruption. BOQ witnessed growth in balance sheet during 1H FY20, supported by improved momentum in housing and commercial businesses. We have valued the stock using price to book value multiple based illustrative relative valuation method and arrived at a target price of an upside of lower double-digit (in percentage terms). For the purpose, we have taken peers such as Bendigo and Adelaide Bank Ltd (ASX: BEN), Westpac Banking Corp (ASX: WBC), Australia and New Zealand Banking Group Ltd (ASX: ANZ) to name few. Hence, considering the decent liquidity and capital levels and balance sheet growth, we give a “Buy” recommendation on the stock at the current market price of $5.900 per share, up by 0.34% on 7^th August 2020.

Comparative Price Chart (Source: Refinitiv, Thomson Reuters)

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