Insurance Australia Group Limited

IAG Details

Issue of Performance Rights: Insurance Australia Group Limited (ASX: IAG) operates general insurance business in Australia and New Zealand with segments - Direct Insurance Australia, Intermediated Insurance Australia, and New Zealand. On 4 November 2021, IAG issued 3.80 million performance rights and 2.90 million award rights to a few key management personnel (KMP) as per an employee incentive scheme.

No Longer A Substantial Shareholder: On 5 November 2021, Vanguard Group held ~4.862% voting power in IAG and ceased to be a substantial shareholder in the company.

Perils Update & Revised Guidance:

• IAG has revised the estimation for the net natural perils claim costs at ~$1,045 million versus the previously forecasted ~$765 million for FY22 due to the cumulative impact of various natural calamities recently in Australia.
• Even the net natural perils claim costs for the first four months of FY22 (ended 31 October 2021) is estimated to be ~$535 million and has surpassed company’s expectation by ~$280 million.

AGM Presentation Highlights-

• The company incurred ~$427 million of net loss after tax during FY21 due to pre-tax provisions of ~$1.5 billion related with COVID-19 impact, customer refunds, and payroll compliance.
• IAG earned an insurance profit of ~$1,007 million, up by ~35.9% YoY and an insurance margin of ~13.5% during FY21.
• During FY21, IAG undertook key changes with the addition of a new CEO, renewed corporate strategy, reformed operating structure, and changed leadership for its main operating divisions.
• In a move to hold executives responsible for risk failures in FY20 and FY21, the Board has started an independent review of its remuneration framework and decided to have incentive targets and measures.
• The company resumed dividends payment with ~13 cents per share (cps) of final dividend and ~20 cps dividend for FY21.

Dividend History FY17-FY21; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of natural disasters such as bushfires, floods, etc. It faces insurance risks due to inadequate underwriting and/ or unsuitable product pricing, reduced volumes in the reinsurance market, and COVID-19 impact of increased default risk from premium debtors.

Outlook:

• IAG now expects to earn a lower insurance margin of ~10.0 - 12.0% versus ~13.5 - 15.5% in FY22. The company aspires to earn an insurance margin of ~15-17% in the mid-term led by organic direct customer growth.
• IAG maintains the guidance of a ‘low single-digit growth’ for GWP for FY22.
• It expects to generate at least ~$250 million of insurance profit over the next three (3) – five (5) years for the Intermediated Insurance Australia segment.
• The company anticipates delivering efficiencies due to further simplification in the cost structure over 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 ~15.45% in the past three months and a negative return of ~10.68% in the past six 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 in FY21, higher estimated net natural peril claim costs, and lower insurance margin guidance for FY22. For this purpose of valuation, few peers like Suncorp Group Limited (ASX: SUN), Steadfast Group Limited (ASX: SDF), QBE Insurance Group Limited (ASX: QBE), and others have been considered. Considering the current trading levels, increase in insurance profit, GWP, cash ROE, and net cash flows from operating activities, cost efficiencies and insurance profit targeted for mid-term, GWP single-digit growth in FY22, valuation upside, and associated key business risks, we give a ‘Buy’ rating on the stock at the current market price of $4.390, as of 30 November 2021, 10:30 AM (GMT+10), Sydney, Eastern Australia.

IAG Daily Technical Chart, Data Source: REFINITIV 

Latitude Group Holdings Limited

LFS Details

Conference Presentation Highlights: Latitude Group Holdings Limited (ASX: LFS) is a digital payment and lending firm operating in New Zealand and Australia. It offers Instalments (L-Pay) and Lending (L-Money) consumer finance products to consumers. On 16 November 2021, the CEO and MD Ahmed Fahour presented the following highlights at the Macquarie Emerging Leaders Conference:

• LFS expects robust growth potential in the receivables and volume from the ease of COVID-19 restrictions, reopening of overseas travel, and implementation of its growth strategies.
• LFS is advancing with the business integration of Symple Loans acquired in October 2021 to achieve program milestones. It expects ~$26 million annualised synergies in FY22 and ~$41 million annualised synergies in FY23.
• The company has recently introduced Personal Loans in Canada which offers ~$600 billion opportunity in consumer receivable balances outstanding. The initial results are encouraging and expected to increase due to robust customer demand, increased marketing spending, and refinement of credit underwriting strategies.

Grant of Shares: LFS issued ~2.13 million shares for nil consideration to a few key management personnel (KMP) under a long-term incentive scheme as mentioned in the Prospectus dated 30 March 2021.

1HFY21 Results:

• The total transaction volume grew by ~5.4% YoY in 1HFY21 led by volume growth in Australia and New Zealand across both Instalments and Lending products.
• Total management operating expenses fell by ~10.5% YoY to ~$185.7 million in 1HFY21.
• LFS invested ~$35.1 million in its simplification program and new LatitudePay+ (Big-ticket) in 1HFY21 and started to invest in the Asian expansion.

Total Operating Income & Net Income FY20 to FY21; (Analysis by Kalkine Group)

Key Risks: The company risks realisation of acquisition synergies, new product launches in new geographies, and COVID-19 lockdowns in Australia and New Zealand.

Outlook:

• LFS expects multiple opportunities to grow business in 2HFY21 due to the recent acquisition of Symple Loans. It plans to accelerate the launch of LatitudePay+, a big-ticket BNPL offering to allow customers to make purchases of up to $10,000 and progressing to launch in Asia.
• As the COVID-19 restrictions ease down, LFS expects spending to recover quickly and pent-up demand to drive volumes as experienced in November 2020.
• The company is on track to meet the provided dividend guidance of 7.85 cps, fully franked for 2HFY21, and a dividend payout ratio of ~60% - 70% of cash NPAT.
  

Valuation Methodology: EV/EBITDA 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 LFS gave a negative return of ~12.01% in the past three months and a negative return of ~16.66% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $1.960 - $2.990. The stock has been valued using the Enterprise Value to EBITDA 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’ median EV/EBITDA multiple, considering lower net interest income, negative cash flows, leveraged balance sheet in 1HFY21, continuing risk of COVID-19 lockdowns, and higher repayment rates. For this purpose of valuation, few peers like Credit Corp Group Limited (ASX: CCP), Humm Group Limited (ASX: HUM), WISR Limited (ASX: WZR) have been considered. Considering the low trading levels, increase in NPAT & volume growth in 1HFY21, the launch of LatitudePay+ and fully franked final dividend in 2HFY21, valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the closing market price of $2.050, as of 30 November 2021.

LFS Daily Technical Chart, Data Source: REFINITIV 

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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