By: Topline Securities Pakistan Limited
Investment thesis: We reinitiate our coverage on Pakistan’s 2nd largest non-life insurance company Adamjee Insurance Company Limited (AICL) with a ‘Buy’ call. Our liking for the stock is driven by factors including 1) improving underwriting business led by macroeconomic recovery, 2) growing life insurance business & 3) decent return expected from investment portfolio. We expect AICL to post 16% earnings growth in 2015 and 15% in 2016. Currently, it trades at 10% discount to its last 3-year (2012-14) average PE of 10.4x and is at a significant 27% discount to peer companies’ average PE of 13.0x. The stock is also trading at 18% discount to its portfolio value of Rs72/share. Our 12-month AICL’s target price of Rs69/share offers an upside of 17%.
Underwriting business improving: Economic recovery is likely to drive underwriting business of the company. Pakistan GDP growth for FY16-18 is estimated at 5.5% higher than average GDP growth of 4% during last 3 years. Pakistan non life insurance penetration is 0.2% in 2014 (total insurance penetration 0.4%), which is one of the lowest in region. We believe that increasing car financing, better security situation and improving underwriting business in UAE will help underwriting business of AICL. Moreover, upcoming energy sector projects and global expansion will further support underwriting business.
Growth in life insurance to remain strong: Gross premium of life insurance grew at a 3-year (2012-14) CAGR of 79%. As a result, market share of AICL grew to 11% in 2014 from 4% in 2011. Life business will continue to post strong growth led by banc assurance business with the help of strong MCB bank network.