On June 30, this column nominated Genworth Mortgage Insurance Australia as a ‘top stock to play the housing trend‘. Genworth has since rallied from $3.20 to $3.51 after this week beating market expectations for its full-year profit range. Further gains are likely.
To recap, Genworth listed on ASX in May 2014 after raising $583 million at $2.65 a share in one of the market’s more anticipated Initial Public Offerings (IPO).
Genworth price chart
I wrote for The Bull that Genworth should benefit from continued strength in property demand and new housing construction in the next three years. A dominant position as Australia’s largest mortgage insurance provider, solid pricing power, and an 8 per cent fully franked yield at the time also made Genworth attractive to value investors.
Genworth did not disappoint with its first-half earnings release, reporting a 40 per cent rise in underlying net profit of $133.1 million for the half-year to June 30, 2014.
Its full-year guidance said: “Based on the first-half results, and subject to business conditions and unforeseen economic events, Genworth now expects to deliver a full-year underlying net profit after tax of between $231.1 million and $250 million.” The prospect forecast was for NPAT of $231.1 million.
The first-half result benefitted from a strong housing market, which meant fewer home loans in arrears and mortgage insurance claims.
Readers might ask if it is time to take profits in Genworth after strong gains this week. The share price has surpassed several broker targets, including Macquarie Equities Research’s original target of $3.43 and Morningstar’s fair value of $3.50. Macquarie has since lifted its target to $3.70.
Other brokers have warned that Genworth is benefiting from higher premium rates charged during the Global Financial Crisis, and that these will not last. I wrote that Genworth would be the worst stock to own if the property market turned and mortgage insurance claims soared.
But Genworth shareholders should let their profits run before rushing to sell. Reports this week that the property boom is peaking look premature. With interest rates at record lows, and unlikely to move higher in a hurry, housing should continue to make solid, if not spectacular gains this year and next.
Two catalysts could change that view: a spike in unemployment, and the Reserve Bank lifting the official cash rate sooner and more aggressively than the market expects. I cannot see either happening in the next 18 months in what should be a long, grinding economic recovery.
Under that scenario, Genworth should continue to do well, given its high leverage to the economic cycle and housing market. The company’s strong balance sheet and the potential to return surplus capital to shareholders in coming years gives further comfort if conditions deteriorate. And I like IPOs that beat market expectations in their first year; too many disappoint because their valuation is overinflated by unrealistic earnings forecasts.
This column’s other insurance idea, Austbrokers Holdings, has been more muted. I nominated it to readers at $10 a share in March 2014. I wrote: “After its recent weakness, Austbrokers looks better value than Steadfast Group and Cover-More and, if not flashing green for buy, is finally flashing orange after strong price gains in recent years.”
After rallying to $10.75 in late June, Austbrokers has drifted to $9.97. Concerns about falling insurance premiums and a tough climate for Austbrokers’ target market of small and medium-size enterprises have spooked the market. Further short-term price weakness would not surprise.
However, the long-term fundamentals for Austbrokers are firmly intact: SMEs are a huge market, there is great potential for consolidation of insurance brokers as baby-boomer owners exit the workforce, and the company can continue to grow by consolidating smaller players.
So I’ll keep the faith in Austbrokers for now. The $11.08 price target, based on consensus analyst forecasts, looks about right.
Austbrokers’ newly listed rival, Steadfast Group, also looks more interesting after recent price falls. It has slumped to $1.36, from a 52-week high of $1.85 amid concerns over lower premiums. Steadfast is a good operator, but it ran too far, too fast after its float in August 2013, when it raised $333 million at $1.15 a share. At its peak, it traded at too big a premium to Austbrokers.
Some good judges I know are taking a close look at Steadfast at these prices. I prefer to watch and wait for better value, and will stick with Austbrokers as the preferred insurance broking play. Still, keep a close eye on Steadfast’s full-year result in August. Both insurance brokers will offer good value if recent price weakness persists.
Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at July 30 2014.
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