Preview Q4 Protector Forsikring ASA – Base case Target price unchanged (200) - Buy
There are 3 things you should look for in Q4: volume, combined ratio, and investment return. In this preview I will also look at the three analysts covering Protector. So far, I have been better in Q2 and Q3 - probably beginner’s luck – let us check out Q4 and see whether I am lucky again My base case assumptions (leading to share price 200) are volume growth 9%, CR 90%, and bond return 4% on an annual basis.
I have now done my Gorden Growth model and it ends up with an intrinsic value sized 216 kr . My peer comparison is now moving north of 200 (changes in bond return expectations) but will first be updated after Q4.
Volume (GPW): Let’s make it short. It will be double digit. My estimate is minimum 15% growth (LCY) in a relatively small quarter driven by price increases, low churn, new business in UK and a stable market share in Scandinavia. Look out for Protectors announced January 1.st premium update on Friday 20th.
Combined Ratio: My estimate in Q4 is 92%. Seasonality CR is higher in Q4 than Q2/Q3 but lower than Q1. Since it has been a “lot of weather” both in Scandinavia and in UK (Direct Line just sent out a profit warning linked to weather claims in UK in Q4) the risk is on the upside. Let’s see, it is not that important. The important thing is a 2022 CR somewhat below 90% including some reserve gains. I will update you on my 2023 expectations after Q4 but my base case assumption is still a long term CR at 90%.
Invest income in a quarter is not at all important, but when realities are different from expectations and consensus you can act on it. In Q4 realities are higher than consensus , and in my opinion also higher than market expectations. Market is stupid as always I know - you might think I’m stupid . Investment income will be as high as 594 MNOK in Q4 due to; 1) Equities performing better than any benchmark (close to 15%) 2) High running yield in portfolio (5.5% entering Q4 and growing through the quarter) and 3) Spread contraction of some modest 20 bsp in total. Remember, equities are free of tax, leading to a very low tax rate in Q4 and higher EPS than you think. Running yield is still moving north (interest rates continue up/time lag/spread contraction). My estimate now is 5.7%. The only company in the Nordic benefitting more from this bond hike Is probably Storebrand (Buy). Again, my base case assumption leading to NOK 200/share is 4.0% leaving a lot of room for interest rates to move down in 2024 and/or 2025 and later.
Summary and Question; Margin of safety buying Protector at 132 when 2023 multiples are far, far lower than peers despite growing faster every year (21% CAGR last 10 years and 15% in 2022). If I’m wrong your dividend yield next year will be 8% (share price 132), you can live with that – can’t you?
Disclaimer: I’m a significant shareholder and bought more in Q4, so you cannot trust me (or perhaps you can?).
Sverre Bjerkeli
Analyst trainee
Hvaler Invest AS
Lillestrøm, January 16th 2023
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SEB øker kursmålet til NOK 165 (155), gjentar kjøp.