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3 VALUE STOCKS - Insurance Australia Group + Newcrest Mining + FlexiGroup Limited

September 23, 2015 | Team Kalkine
3 VALUE STOCKS - Insurance Australia Group + Newcrest Mining + FlexiGroup Limited

Insurance Australia Group



Growth generated via Berkshire Hathaway Strategic Alliance and Asian Pacific markets : Insurance Australia Group Ltd (ASX:IAG) delivered a poor fiscal year of 2015 performance with itsInsurance profit decreasing to $1.1 billion as compared to $1.6 billion in the prior corresponding year. The underlying insurance margin reduced to 13.1% in FY15 from 14.2% in prior corresponding period (pcp). Although, personal insurance rose 5.2% in GWP, the net natural peril claims costs offset the gain, and surged to $1.05 billion in FY15, which is $348 million more than the allotted allowance of $700 million for the year. On the other hand, IAG entered into a strategic relationship with Berkshire Hathaway, with 20% quota share agreement across the group’s insurance business, so that IAG could shield its earnings volatility and capital requirements for the next ten years. IAG intends to maintain its 15% return on equity through this move. Insurance Australia estimates that this quota share arrangement would reduce its capital requirement of over $700 million for the next five years, while $400 million of that benefit estimated to be realized by FY16. This agreement would also support the group’s focus on Asia pacific markets. Insurance Australia Group intends to raise its stake in SBI General, the general insurance joint venture with State Bank of India, to 49% from 24% subsequent to the legislative changes on foreign ownership by the end of 2015 fiscal year. The group also acquired PT Asuransi Parolamas, a small general insurance company, to get insurance license in Indonesia. IAG launched InsureLite, a new solution for families seeking for home insurance affordability stress in Queensland. There is still food for thought about the reserves requirements for the New Zealand quakes alongside the questions arising around the expected investment in China and Asia.
 
Stock Performance: Insurance Australia Group shares plunged over 13% in just last four weeks due to lower than estimated 2015 results. But investors should note that the management issued a positive outlook for next fiscal year and estimates insurance margin to be in the range of 14% to 16%, including a 2% contribution from the Berkshire Hathaway agreement. IAG also has a decent annual dividend yield of 5.85%. We remain upbeat on the stock and give a “BUY” recommendation at the current levels of $4.86.


IAG Daily Chart (Source: Thomson Reuters)

Newcrest Mining Limited


Ongoing cost optimization and enhanced production: Newcrest Mining Limited (ASX: NCM) delivered a 19% year on year (yoy) improvement in underlying profit to $515 million, driven by better production at Cadia East and weak Australian dollar leading to gold and copper prices increase in AUD. The group improved its Gold production by 1% yoy, while its Copper production rose 12% yoy. Meanwhile, NCM’s AISC margin rose to USD 447/oz, as the higher margin Cadia – Ridgeway & Panel Cave 1 contribution surpassed the expectations. Lihir also delivered an outstanding annual grinding throughput. NCM also recently received an approval to increase the permit for the upper limit of processing plant capacity from 27 million tonnes per annum (Mtpa) to 32 Mtpa for its Cadia East Project. Golpu project’s feasibility Study is also on track and would be finalized by the end of the year. Recent update entails NCM’s agreement of terms with Taruga Gold to take an up to 75% stake in its Dalakala concession.


NCM Daily Chart (Source: Thomson Reuters)

Stock Performance: The shares of NCM rallied over 16.3% in the last four weeks owing to the improving gold prices in AUD. We remain bullish on NCM and give a “BUY” recommendation at the current price of $11.93.


Leading Cost Position (Source: Company Reports)

FlexiGroup Limited



Positive guidance would offset management changes: FlexiGroup Limited (ASX: FXL) delivereda 6% yoy increase in its full year cash NPAT to $90.1 million for FY15, driven by improved performance across its Interest Free Cards, New Zealand business and Certegy segments. Volumes and receivables surged by 5% and 8% respectively on a year over year basis. The group’s transaction volume for its Certegy segment rose by 9% yoy to $552 million, but small and medium enterprise (SME) leasing division witnessed 23% yoy decline during the year. FXL improved its fully franked annual dividends by 8% yoy to 17.75 cents per share. But, Flexigroup corrected over 24.3% in the last three months (as of Sep 18 close) partly attributed to the sudden management changes the group is undergoing with CEO and the Managing Director, Tarek Robbiati announcing his resignation. The group’schairman Chris Beare and non-executive director Anne Ward also announced their resignations from the firm, raising concerns on the group’s performance. The group’s founding director, Andrew Abercrombie took over as acting chairman. However, investors need to note that FXL gave a positive guidance and estimates its Cash NPAT to be in the range of $92 million - $94 million, for the fiscal year of 2016, while dividends are estimated to be in the range of 50-60% of Cash NPAT. Lower interest rates could drive the demand for FXL products. Flexigroup’s core Certegy business growth would be driven by the better VIP customer program, improved penetration through present retail partners and expansion into new product and merchants. The group is targeting the Education sector in New Zealand Leasing to boost its volumes. To offset the pressure from the Enterprise Leasing segment, FXL is reorganizing the business to focus on broker based origination channels and managed service products.
 

FXL Daily Chart (Source: Thomson Reuters) 
 
With FXL trading at attractive P/E of 9.1x, and a solid dividend yield of 7.1%, we reiterate our positive stance on the stock and give “BUY” recommendation at the current price of $2.46.
 
 
FY15 Performance (Source: Company Reports)


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