Strong premium growth Guaranty Trust Assurance Plc recently released its Q1 2012 financial performance, reporting a 22% YoY growth in gross premiums to N5.3 billion, 4% lower than our N5.5 billion forecast. While the financials as released do not provide the required detail, we believe most of the growth is due largely to strong performances in its life, motor, oil & energy and marine business lines – traditionally the strongest business lines in recent years. Significantly, Q1 has contributed ~49% of total premiums on average over the last 3 years.
Total expenses grew 30% YoY to N1.15 billion. Pending the release of more detailed financials, we suspect the company’s reinsurance costs rose during the period as the oil & gas business’ contributions to total premiums increased, having reinsured 89% of its oil & energy premiums for FY 2011based on which management appears unwilling to bear much of the risk from its oil & energy premiums.
Impact of increased expenses muted as income grows… The company’s income grew 47% YoY to N1.62 billion in the period. We believe this was largely on the back of improvements in investment income, after a 21% QoQ increase in investment securities to N12.1 billion. On the other hand, cash & bank balances and trading properties declined 26% and 36% QoQ respectively. In a 2011 analyst briefing, management had communicated plans to reorient its balance sheet towards a higher income profile and we believe the shift was largely driven by a desire to take advantage of the still relatively high yields in the fixed income space.
Strong income growth fed through into a 115% YoY increase in PBT to N470 million. With taxes flat at ~N93 million, implying a tax rate of 20%, PAT rose 200% YoY to N376 million pushing pre-tax and net margin 4ppts higher each YoY to 9% and 7% respectively. Based on our FY2012 PAT forecast of N1.23 billion and assumptions around average quarterly contributions to net income, PAT was a marginal 5% ahead of our N359 million estimates.
Tender offer Following GT Bank’s divestment of its 67% holdings in GT Assurance to Assur Africa Holdings in Q3 2011, the latter has recently launched a takeover bid for the balance of GT Assurance shares publicly held, as it is entitled to. The company has a made an offer of N1.76 per share; the same price at which it bought GT Bank’s stake. The offer recently opened on the 2nd of May, and investors have been given a period of 3 weeks to accept or decline the offer. The company also hopes to have all takeover activities concluded in Q2 2012.
We maintain our valuation assumptions We maintain our gross premium forecast of N11.8 billion for FY 2012, as we remain positive on the company’s ability to continue to grow premiums, with its strong institutional business and improving retail business supporting premium growth. Furthermore, we retain our FY 2012 PAT forecast of N1.23 billion, as improved earnings on its assets, attractive fixed income yields and an improving capital market provide support for profitability.
Nevertheless, the stock currently trades at a 2012 forward P/E of 13.3x and P/B of 1.1x compared to an average of 5.5x and 0.6x respectively for stocks under our coverage. Friday’s closing price of N1.66, which is a 31% increase since our last report on the stock, stands at a premium of 25% to our current N1.33 target. This also puts the tender at a 32% premium to our target price, making it attractive in our view.
ARM ratings and recommendations ARM now employs a two-tier rating system which is based on systemic importance of the security under review and the deviation of our target price for the stock from current market price. We characterize systemic importance as a function of a stock’s ranking among the group of top 20 stocks by NSE market capitalization over a trailing 6 month period (minimum) to the review date. We adopt a 5 point rating system for this category of stocks and a 3 point rating system for stocks outside this group. The choice of top 20 stocks arises from the consideration that this group of stocks constitutes >75% of overall market capitalization and stocks outside this group are generally less liquid and individually account for <<1% of market capitalization. For stocks in both categories, the basis for ratings subject to target price deviation is outlined below:
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