Friday, March 24Welcome

Admiral Stock: Unfairly downgraded by UK politics and peer results (OTCMKTS:AMIGF)

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Why is Admiral’s stock price going down?

We review Admiral Group plc (OTCPK:AMIGY) for the first time since its first half 2022 results on 10 August after its share price fell below 2,000 pence on Tuesday (27 September).

Admiral Stock Price (Final 1 Year)

Admiral's Stock Price (Past Year)

Source: Google Finance (09/27/2022).

In our view, the fall in Admiral stock was driven by two developments:

  • UK interest rates rise significantly as British pound falls, especially after government ‘mini-budget’
  • Poor results reported by Saga plc (OTC:SGPLF), Admiral’s niche competitor in auto and home insurance

We believe the decline in Admiral’s stock price is unfair. Currency depreciation and rising government bond yields have little real impact on Admiral’s business, but the former is negative for international investors. The bad results in the Saga are actually positive, as they show how recent regulatory changes are in favor of the Admirals. Additionally, billing cost inflation is similar to what others reported in the first half, and pricing is improving.

Compared to pre-COVID 2019, the stock traded at 13.1x when Admiral had 19% fewer UK vehicles insured. Our forecast is for a total return of 124% (31.4% annualized) and a dividend yield of 8% by the end of 2025. buy.

Admiral Buy Case Summary

Admiral is a British insurance company with a market capitalization of £5.9 billion ($6.3 billion). Most of the profit before tax (“PBT”) is generated by UK motor insurance, the market leader. It also offers household insurance, travel insurance and personal loans, and has small offices in Italy, France, Spain and the United States.

Admiral PBT by Business (2014-21)

Admiral PBT by Business (2014-21)

Source: Documents of the Admiralty Company.

The rating was upgraded to Buy in October 2020. Our investment case focuses on the UK motor business.

  • The sector continues to grow structurally, with the number of vehicles historically growing at a rate of 1-2% annually and premiums rising over time due to rising costs of both vehicle and medical claims. rising.
  • Admiral continued to gain market share and generate solid profits. This is because their lower expense ratios (due to scale and efficiency) allow them to achieve higher margins while offering insurance at lower prices than their competitors.
  • Admiral’s growth will vary at different stages of the insurance cycle, but we believe we can achieve a high single-digit EPS CAGR. Over the period 2015-19, which is considered to represent the full cycle, UK Motor’s CAGR was 6.8% for vehicles and 8.2% for premiums and profits combined.
  • Regulatory reforms in 2022 will require insurers to offer the same price to new and existing customers, resulting in higher prices for new business, making the sector more profitable and entrenching leaders like Admiral. increase.

Admiral’s other operations are smaller, with a total PBT of just £5.2m in 2021. Some are in deficit. They have the potential to create great value in the long run, but this is not our investment case.

Admiral’s profitability is expected to temporarily decline in 2022 as post-COVID-19 billing frequencies normalize, billing costs rise and sector pricing still adapts to new regulatory reforms. Admiral has far outperformed its peers so far, with his UK Motor PBT in the first half of 2022 25.9% higher than in 2019 and Group PBT for the full year 2022 10% higher than in 2019. I expect it to be expensive.

After recent developments, our view remains the same.

Changes in UK currency and interest rates

Since the Admiral’s first half 2022 results were released on August 10, the British pound has fallen 12% against the US dollar, including a 5% decline since last Thursday (September 22). market sentiment has deteriorated significantly.

GBP/USD exchange rate (last 1 Year)

GBP/USD exchange rate (past year)

Source: Google Finance (09/27/2022).

Yields on UK government bonds have risen accordingly (negative as it means higher government borrowing costs), with 10-year yields now at 4.48%, up from 3.31% a week ago and 2.64% a month ago. was:

cormorant.K. Government Bond Yields (recent period and previous period)

UK Government Bond Yields (Last and Historical Periods)

Source: Financial Times (27 September 2022).

The UK faces a number of macro headwinds. In particular, rising energy costs after Russia’s invasion of Ukraine in February and rising trade barriers with the European Union after the transition period ends at the end of 2020. Market sentiment turned downward again after the new Liz Truss government announced its first ‘mini-budget’ on Friday (September 23) with new Finance Minister Kwasi Kwarten.

A “mini-budget” centered around tax cuts was deemed by many commentators to be financially unsustainable. Ken Clarke, one of Kwarteng’s predecessors, commented:

Unfortunately, that is what is usually attempted in Latin American countries, but without success… We are heading in the direction of Italy. It will be a very big problem in the short term. Instead of attracting investment, we’re going to drive it away.”

UBS (UBS) Wealth Management chief economist Paul Donovan even called the new Truss government a “doomsday cult.”

Many investors have completely lost faith in the current UK government, causing the pound to fall and yields on UK government bonds to rise.

Little impact on Admiral’s business

Changes in the value of the pound and yields on UK government bonds will not have a material impact on Admiral’s business.

Admiral’s annual report quantifies the direct impact of such changes as small. As of 2021, for currency risk, the group’s PBT is expected to fall by only £1.9m (from £769m) for each 10% fall in the pound against the dollar. Also, for every 25% move in both the dollar and the euro, the group solvency ratio is expected to decrease by only 3 ppt (out of 195%).Similarly, every 50bps rejected We expect a 3 ppt reduction in the group solvency ratio on the yield curve (which is gain The yield curve is actually positive). Ultimately, the Admiralty is primarily UK-earning and has a well-matched asset and liability balance sheet.

Both pressure on consumer incomes and inflation in claims costs will play a part, but there will be an indirect effect. When the pound gets cheaper, everything, including replacement cars and repair parts, becomes more expensive for UK consumers. However, many consumers consider owning a car essential, and auto insurance premiums have proven resilient during past downturns (as we discussed in a previous article). to). For the same reason, we expect insurers to be able to pass on higher claims costs by increasing pricing over time.

Admiral uses reinsurance and quote insurance provided by international insurers, in particular Munich Re, which underwrites 40% of the UK motor business. But these are long-term relationships that have stabilized through past macro shocks such as Brexit. In particular, my relationship with Munich Re goes back nearly 20 years.

We also note that foreign companies have continued to show interest in acquiring UK insurers since the 2016 Brexit referendum. Canadian Intact Financial (IFC: CA) is buying his RSA UK operations (and other assets) and Nordic Sampo (OTCPK: SAXPY) is buying Hastings. We see no problem with Admiral’s reinsurance.

For non-UK investors, the devaluation of the pound is a real downside as it reduces the value of Admiral shares in their home currencies.

Positive read-across from Saga results

Saga PLC is Admiral’s niche competitor in auto and home insurance, primarily targeting customers over the age of 50. It also has a cruise and travel business.

Saga released its first half 2022 results (ending July 31) on Tuesday (September 27), with its share price down 24% on the day. Admiral’s stock fell 6.3% at one point, before closing he was down 3.9%. Other UK auto insurers were also affected, with Direct Line (OTCPK:DIISY) shares down 3% and Saber Insurance (OTCPK:SBIGY) shares down 2%. However, we believe that Saga’s results actually provided Admiral with a positive read-across.

First, Saga’s results show how recent regulatory changes are favorable to the Admiralty. In Saga Prefecture’s retail brokerage business, which sells auto and other insurance through brokerage, auto insurance sold declined 11% ($54,000) year-on-year, and auto gross premiums written similarly declined year-on-year. A decrease of 11% (£17.4m). -Year:

Saga Retail Broking Financials (H1 2022 vs. PY)

Saga Retail Broking Financials (H1 2022 vs. PY)

Source: Saga financial results announcement (first half of FY2022).

(Auto insurance in Saga fell just 3% year-on-year as it sells multi-year policies that renew less frequently.)

Recall that Admiral actually won 210,000 vehicles (or 4%) in the Motor business in the first half of 2022. Saga could become one of the competitors who lost market share to Admiral. We fund these discounts by attracting new customers and increasing prices for renewal customers.

There were other signs that regulatory reform benefited Admiralty at the expense of Saga.In the first half of fiscal year 2022, Saga generated 50% of its motor and home new business through direct channels, up from a year earlier. 8 ppt reduction in ratio. The remaining 50% came primarily from price comparison websites, a channel Admiral traditionally led. Saga also just introduced his new one-year auto insurance product, which since 2019 has been trying to increase customer retention with multi-year products.

Other comments by Saga management suggest the auto insurance industry remains stable. Saga observes that current billing cost inflation is “around 13%” (for all insurance), not far from his 11% figure (motors only) observed by Admiral in August. . They also see an improvement in market prices due to “movements over the past three months” and a “more rational response.” This is consistent with statements made by other companies last month.

Valuation: 7%+ Dividend Yield

Admiral shares are valued at 1,950.9p and trade at 13.1x P/E for 2019 and 10.0x P/E for 2021.

Admiral’s Income and Ratings (2019-21)

Admiral's Income and Ratings (2019-21)

Source: Documents of the Admiralty Company.

2020 and 2021 benefited from reduced billing frequency due to COVID-19, so 2019 financials are more representative. 2021 also included cash proceeds from the disposal of a price comparison website (“PCW”). However, Admiral now guarantees him 18% more British vehicles than at the end of 2019, and his PBT for the first half of 2022 is already 19% higher than he did.

Admiral’s dividend yield is somewhat subjective due to the one-time component of recent dividends. Dividends were 140p in 2019 and 279p in 2021, the latter including 92p funded by the disposal of PCW. The interim dividend for the first half of 2022 was 105p, compared to 63p announced in the first half of 2019, or 60p, excluding the final 45.0p funded by the PCW disposal. Our forecast based on a 90% payout rate shows a payout of 156.6 pence for 2023.

Compared to the most representative 2023 forecast, the dividend yield is 8.0%.

Return forecast example

No change in forecast. The main assumptions are:

  • 2022 net profit of £490m, 10% higher than 2019
  • From 2023, net profit will grow at an annual rate of 8%
  • The number of shares will increase at an annual rate of 1%
  • Dividend is basically 90% of EPS
  • Implies 20.0x P/E in 2025 and 4.5% dividend yield

Illustrative Admiral Return Prediction

Illustrative Admiral Return Prediction

Source: Librarian Capital estimates.

At a share price of 1,950.9 pence, we expect an exit price of 3,978 pence and a total return of 124% (31.4% annualized) by the end of 2025.

Bottom Line: Is Admiral Stock a Buy?

We reiterate our ratings for Admiral Group PLC stock.

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