Balance Sheet Strengths Vital
Sydney Morning Herald
Saturday August 5, 2000
Q I've decided to hold or buy NRMA Insurance Group shares. What have I got?
A You've got shares in Australia's largest general insurer with 3.7 million customers and a top 30 company on the ASX. It is mainly in ``personal lines" or classes of insurance such as motor, home and contents, private health and compulsory third party.
Q There's been a lot of hype. Will the shares go up?
A The price at which NRMA will start trading will be announced tomorrow. This decision will be critical in determining how well NRMA goes in early trading.
But demand for shares, both from members and professional investors, has been high and there are not enough shares to satisfy their hunger.
Unsatisfied demand should mean that the shares will rise in the first few weeks, possibly as high as $3 or more. But broking analysts value NRMA in a range between $2.50 and $2.60 a share. Longer term, it will need to grow organically and by acquisition for its shares to rise from these levels.
Q Should I worry about management and the board making poor decisions like AMP?
AThere's plenty of talk of ongoing tension between personalities on the board.
But chairman Nick Whitlam says he drafted quality independent directors and some, like John Astbury, are highly regarded.
The names of the board still read like a who's who's of Australian politics (Keating, Collins, Whitlam), though even under the old board the group was able to expand aggressively with takeovers like SGIO in 1998.
Q But lots of people have been losing money in insurance stocks. Why is this any different?
A Fund managers, while admirers of the company's brand and large customer base, say it's not a must have and rival QBE is a better run company. The problem is that because NRMA's profits are heavily reliant on investment earnings and the number of insurance claims, they are volatile something investors hate. NRMA's great strength is its balance sheet and brokers say because the numbers are conservative it has about $500 million in surplus funds to spend. Recent takeovers after a poor period for the sector have heightened expectations that insurance premiums will improve. Running NRMA as a company may also allow it to more aggressively extract cost savings.
EXPERT VIEW
Nick Caley from stockbroker ABN AMRO says NRMA is one of a handful of general insurers in Australia with the capacity to exploit brand and scale.
He values NRMA at $2.57 and says much will depend on the compulsory third party business stabilising after recent reforms in NSW to cut premiums and reduce claim costs.
As with other demutualisations, when it comes to the likely share price, operational issues pale in comparison compared to the impact of the sheer lack of supply of NRMA shares for institutional investors.
GOOD POINTS
* The company and brand size and the ability to lead the market on premiums.
* More growth in other States is highly achievable and will allow economies of scale.
* The opportunity to cross-sell products such as deposits and credit cards to its 3.7 million customers ishuge and with 2 millionof them now shareholders they should be ``sticky".
* Surplus capital for acquisitions is around $500 million and chief executive Eric Dodd has flagged more acquisitions and a possible capital raising.
BAD POINTS
* Profits will be volatile.Burying its history of infighting won't be easy.
* It's not clear that the CTP market has really improved yet.
* Obvious acquisitions, and therefore growth options, are limited.
* Question marks remain over management.
* Competition, including a reinvigorated AMP with GIO, is getting tougher.
FLOAT DETAILS
Price: to be announced tomorrow, but within the range of $2.25 to $2.75.
Hot mail is towards the upper end, though depends oninstitutional interest.
2001F EPS: 18.4c.Dividend payout ratio: to range from 40 per cent to 70 per cent of earnings.
2001F P/E: 15 times (based on $2.75).
© 2000 Sydney Morning Herald