Insurance Australia Group Limited

IAG Details

Looking Overvalued at Current Price: Insurance Australia Group Limited (ASX: IAG) posted decent profit growth of 23.5 per cent to $551 Mn in 1HFY18 as compared to prior corresponding period. This was mainly driven by rate hike in commercial and consumer line, and volume growth in the motor division. Cash net profit after tax (Cash NPAT) increased by 31.5 per cent and amounted to $630 Mn in 1HFY18, while cash return on equity (RoE) increased 430 bps over the same period. Currently, the group is focusing on to delivering through-the-cycle targets of cash return on equity (ROE) 1.5 times of weighted average cost of capital (WACC) and a dividend payout in the range of 60-80% of cash earnings to maximize its shareholder return.

On the other hand, the company has recently agreed to sell its Thai, Indonesian, and Vietnamese operations and is expecting after-tax profit minimum of $200 in its fiscal 2019 results after certain deductions related to allowance costs and foreign currency translation reserve effects. Further, the management stated that the exclusion of these operations will have a negligible impact on gross written premium (GWP) growth for FY18, but it will improve its insurance margin by about 50 basis point. Based on the capital position at 31 December 2017, the sale of Thailand, Indonesia and Vietnam assets is expected to add at least 13 basis points to IAG’s Common Equity Tier 1 (CET1) ratio.
The group has also flagged that for maintaining the 10% EPS growth, new opportunities beyond the system growth of Australia and New Zealand are needed to be identified and the same should be logical and complementary extensions to existing business. Further, the group expects simplification benefits to run the course by FY20 or FY21. Therefore, IAG is continuously on the look-out for further efficiencies across the business. IAG is aiming to invest in five key capabilities, namely, customer experience, data, analytics and artificial intelligence, digital and innovation, to improve customer experience. With these initiatives and efforts in mind, the group reiterated the guidance of low single digital GWP growth, and reported insurance margin at 15.5 to 17.5%.
 

Optimisation Plan (Source: Company Reports)

The stock was up by 19.48 per cent in last six months and by 7.19 per cent in the past five days, as at June 21, 2018. However, compared to key peers in the industry, the stock seems to trade at 52-week higher levels ($8.680) and looks overvalued at the current price. The Asian assets’ sale is expected to improve margins, however, the positives now already seem to be factored in. Therefore, we believe that investors can book profit on the stock while we recommend to “Sell” IAG at the market price of $ 8.570.
 

IAG Daily Chart (Source: Thomson Reuters)

 
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