Genworth Mortgage Insurance Australia Limited

GMA Details

Exclusive Contract: Genworth Mortgage Insurance Australia Limited (ASX: GMA) offers lenders mortgage insurance (LMI) in Australia. It also provides tailored risk and capital management solutions. On 27^th January 2022, GMA has been selected as an exclusive provider of LMI to CBA and RMG businesses of Commonwealth Bank of Australia (CBA). The existing contract will expire on 31^st December 2022. The new contract will:

• Include three years starting from 1^st January 2023 and will expire on 31^st January 2025.
• The contract includes CBA and RMG and excludes Bankwest.

1HFY21 Group’s Financials:

• Premium Income: The net earned premium rose by ~13.3% to ~$205.1 million in 1HFY21 versus ~$150.8 million in 1HFY20. NEP growth was driven by Gross written premium (GWP) and LMI flow volumes.
• Profitability: The company converted its underlying net losses after tax of ~$85.5 million in 1HFY20 to net underlying profits after tax of ~$76.4 in 1HFY21.
• Net Claims: Due to lower delinquencies and higher cures, its net claims incurred were reduced by ~51.2% from ~$101.1 million in 1HFY20 to ~$49.3 million 1HFY21.
• Balance Sheet: The company closed its balance sheet with cash and equivalents to ~$89.6 million at the end of 30^th June 2021 versus ~$80.9 million at the end of 30^th June 2020.

Net Earned Premium Highlight (Source: Analysis by Kalkine Group)

Key Risks:

• COVID-19: The company is vulnerable to the risks associated with the impacts of COVID-19 and the new variant Omicron and affects the employees, operational functions, and thereby profitability.
• Regulatory Risks: With the uncertainty in regulations and approval from government authorities the company is susceptible to the risks associated with the delays.

Outlook: Genworth Financial Inc. (GFI) sold its entire shares in the company, looking forward the completion of the processes will be done by 31^st March 2022 and branding will also continue further in 2022.

Valuation Methodology: EV/Sales 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 the company has given a positive return of ~16.82% in the past six months. Currently, the stock is trading near the average of its 52-week low and high levels of $1.98 and $3.09, respectively. The support and resistance levels for the stock are placed at ~$2.33 and ~$3.00, respectively. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation and arrived at a target price with a correction of medium-single-digit (in % terms). The company can trade at some discount its peers’ average EV/Sales multiple, taking into consideration that the company has been trading at a discount on historic basis to its peers’ average EV/Sales multiple and the risks associated with insurance business, etc. For the purpose of valuation, peers such as Steadfast Group Ltd (ASX: SDF), QBE Insurance Group Ltd (ASX: QBE), and others have been considered. Considering the expected downside in valuation, expected headwinds related to COVID-19 Omicron, changing claims incurred, current trading level, reducing net earned premium and key risks associated with the business, we suggest investors to book profit and give a ‘Sell’ rating on the stock at the current market price of $2.505, 10:30 AM (GMT+10), Sydney, Eastern Australia, as on 31 January 2022.

GMA Daily Technical Chart, Data Source: REFINITIV

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

Note 2: Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and is subject to the factors discussed above alongside support levels provided.

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