Pan Africa Insurance: Undervalued With A Price Target of KES 293 - myStocks: Opinion and Commentary

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Pan Africa Insurance: Undervalued With A Price Target of KES 293

By Rufus Mwanyasi
Comments Wednesday, February 04, 2015 at 6:35 PM EAT

Not long ago, Pan Africa Insurance  featured in the news relating to acquisition plans buy a majority stake in Gateway Insurance, a general insurer. This may be interpreted as a defensive move since the listed life insurer has been losing out in the life business with its market share dropping to 12.5% in 2013 from 15.5% in 2012 thanks to increasing competition. If the acquisition is successful, Pan Africa may increase its market share by gaining re-entry into the general life business which will reflect on the company’s premiums.The company exited the non-life business in 2011 after selling its stake in APA insurance. Gateway’s Insurance’s main business is motor vehicle, personal and public underwriting and controls 0.6% of the general insurance market.

The acquisition will certainly go a long way to bolster its faltering life business. However this is not to say all is gloom and doom with its life business. In fact, Pan Africa has retained second position in individual life market share for the past five years (2008 – 2012) behind market leader Britam. Moreover, the insurer is still the market leader in group life market share topping 4 out of the past 5 years (second position in 2011). A peek at its fundamental performance shows a solid company relative to its peers (see tables below). Pan Africa insurance enjoys one of the lowest expense ratios in the industry (16.7%) while both return on equity and return on assets stood at 37.5% and 5.9% respectively as at the end of 2013 which is quite remarkable.

Table 1:

Income Statement (KES '000)FY 2010FY 2011FY 2012FY 2013
Gross Premium Income3,830,6933,648,4925,440,6545,324,099
Premium ceded to reinsurers(284,744)(348,437)(315,020)(222,272)
Net Premium Income3,542,9493,300,0555,125,6345,101,827
Commission Income66,63984,58975,86652,680
Investment return420,398697,0151,244,5741,534,084
Fair Value gains /(Losses)689,884(895,668)879,8631,168,709
Other Operating Revenue128,684664,793554,694685,054
Total Other revenue1,305,605550,7292,754,9973,440,527
Total Revenue4,848,5543,850,7847,880,6318,542,354
Net Claims & Policy holders benefits(2,999,399)(1,876,475)(5,521,395)(5,274,338)
Commissions Payable(890,311)(690,346)(669,678)(724,477)
Other Operating & Operating Expenses(603,311)(733,046)(856,582)(960,408)
Cost of Sales---(68,775)
Total Benefits, Claims & Other Expenses(4,492,753)(3,299,867)(7,047,655)(7,027,998)
Profit before Tax661,700552,435834,6461,516,644
Profit after tax585,758443,405698,2711,250,432

Table 2:

Balance Sheet (KES '000)FY 2010FY 2011FY 2012FY 2013
Investment properties435,600766,618820,000922,282
Held to Maturity Financial Assets2,056,0522,453,5284,078,9955,536,053
Fair Value through Profit & Loss3,900,2923,449,2975,038,6098,181,718
Deposits with Financial Institutions-2,807,8184,169,3704,505,266
Total Assets10,671,62111,499,22916,473,52221,157,507
Insurance Contract Liabilities3,178,8113,469,5045,221,3656,868,452
Investment Contract Liabilities4,022,1474,390,2986,680,7018,069,684
Deposit administration Contracts706,181681,5471,071,6331,335,921
Total Liabilities8,839,1009,376,58914,100,25817,799,064
Shareholder Funds1,832,5212,122,6402,628,9113,338,443

A quick projection (2015-2018) using Dividend Discount Model (DDM) based on the following assumptions: a discount rate of 7% (as a traditionally accepted long term rate of return on the market), earnings per share (EPS) and dividend per share (DPS) growth rate estimation of 8% per annum and 25%-30% per annum respectively, current P/E ratio as the terminal P/E measure, I forecast an upside to Kshs.293 from the current level which would equate to 25% return per year. Indeed, income-oriented investors would envy such a higher rate of return.

Assuming this model is right, then this “acquisition story” makes an interesting potential catalyst for realising Pan Africa value. At the time of writing, Pan Africa’s price-to-earnings ratio (P/E) was at 8.97, slightly lower than the sectors P/E ratio at 11.78 which further proves why this stock is a good buy candidate. Investors are advised to consider more facts about the company, both quantitative and qualitative, before venturing into the stock and not solely rely on this analysis. 

Labels: BRIT,   PAFR


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