Mapfre reported declining revenues (-4.5% yoy tp €7.33bn) and weaker net earnings (-32% yoy to €127m). This decline was not caused by COVID-19 but by nat cat events. Excluding these, the net earnings stood at €190m, up 3% yoy. The insurer expects to see the consequence of the pandemic in Q2. The market’s volatility should also impact investment income. The capital position at March 2020 was not revealed, but Mapfre said that it was solid enough.
In FY 19, Mapfre’s revenues increased by 7.1% to €28,472m, driven by the improvement in Non-Life premiums (up 2.9% to €17,559m). Iberia continues to be the key profits generator, with an attributable result of €497m (>81% of the group’s). We appreciate the positive trends in the restructured business units in Brazil and the US. However, Mapfre Re needs additional time to reduce its exposure to global risks. The dividend was stable, as announced by the insurer in late 2019.
Our model integrates perfectly the losses announced by Mapfre and relative to the recent nat cat events and disturbances in Chile. We anticipated also a stable dividend for FY 19 and a decreasing Solvency II ratio. The company confirmed the fragility of its profitability and its high dependence on its Spanish business. However, it is still enjoying a solid capital position.
Mapfre reiterated the scenario of H1 19 with better revenues (up 6.5% at current FX to €21,619m) but lower earnings (-12.5% to €463m). The insurer decided to revise the business outlook of MAPFRE ASISTENCIA’s companies in the UK, the US and Canada, leading to goodwill writedowns of €77m. If we take into consideration the impairments of December 2018, the net profut of the group would have been stable relative to 9M 18. The Solvency II ratio remained solid at 198%.
Despite improved revenues (up 6.8% at current FX) to €15,051m, coming from both Life and Non-Life business, Mapfre was unable to increase its net profit (-2.9% to €374m). The pressure on profitability came from the Life business (-37.8% in insurance result to €252m). The Brazilian and LatAm South operations were behind this drop. The Non-Life business was more resilient, and the combined ratio was in line with the fixed target (<96%). We will revise down our estimates.
The Non-Life business of Mapfre is under pressure with a voluntary rigorous underwriting policy and growing competition. The deal with Santander is an opportunity to increase sales volumes at a relatively lower cost. In addition, the expertise of the bank in the SME segment is a guarantee for the quality of the future business.
Mapfre began well 2019 in terms of sales with a 5.8% rise in revenues to €7,674m. Non-Life and Life premiums reached €4,999m (up 0.7% yoy) and €1,399m (up 13.7% yoy), respectively. The Iberian units are the heart of the insurer’s profitability with a net profit of €119.6m, while the group’s one amounted to €188.1m. Mapfre Re is another business unit undergoing change with the integration of the Global Risks operations. We expect a better performance in next quarters.
FY 18 Mapfre’s revenues declined by 5% to €26,589m, driven by the Non-Life premiums’ drop (-6% to €17,060m). The negative trend in emerging currencies was damaging to the insurer. The Life business posted a 2.8% increase in sales, but the division’s earnings declined 5.3% yoy to €681m. Net profit decreased by 24.5% to €529m. The ongoing restructuring process has negatively impacted the FY 18 earnings, but the dividend was kept at the expected level.
Mapfre completed the sale of its New York operations announced in June 2018. This is part of the strategy to focus on core states and lines of business. The US business should continue to post weak operating performances in 2019-20 despite management’s efforts. The performance and the valuation of the Spanish company is largely driven by local and Brazilian operations.
9M 18 Mapfre’s revenues declined by 4.7% to €20,296m, driven by the Non-Life drop (-7.1% to €13,086m). The negative trend in emerging currencies was damaging for the insurer. The results of the Life and Non-Life business remained steady, at €640m and €566m, respectively. The net profit increased by 18.9% to €528m. Mapfre has received the regulatory authorisation to complete its Brazilian restructuring. No major changes are expected in our model. The ongoing restructuring process is making the FY 18 earnings structure fragile.
A difficult H1 18 for Mapfre, which recorded a decline in all indicators: -8.7% in revenues to €14,091m, and -7.1% in net profit to €385m. Adjusted for the US exit plan in 2018 and the corporate transactions in 2017, the attributable result posted a 1.1% improvement. With the depreciation of emerging currencies, the profitability of the insurer is more than linked to the Iberian and reinsurance businesses. Earnings should show fragility with the current reorganisation processes in major markets.
Mapfre posted mixed figures for Q1 18. While the insurer posted growth in local currencies, FX movements hurt the group’s accounts. Sales and net earnings dropped by 7.6% to €7,257m and 9.3% to €187m, respectively. The low interest rates have negatively impacted financial income. The next quarter should record the beginning of a recovery in technical performance, even if the financial income should remain under pressure. Our numbers will be revised down.
Mapfre released better than expected net profit, decreasing by only 9.7% to €700m under the weight of the Nat Cat impact (€157m). However, the dividend was kept at €0.145/share. The Spanish insurer also announced the signature of a new framework for the partnership with Banco do Brasil allowing it to control 100% of the Motor and Large Risk business in the bancassurance channel, while maintaining exclusivity for the distribution of products in the bank channel.
Mapfre had warned investors last month that the exceptional hurricanes Harvey, Irma and Maria, and the earthquakes in Mexico would have a negative impact in the range €150-200m on the group’s attributable profit. However, in its Q3 report, the group does not know the exact total cost of the damage from these events, nor does it know that part of the cost corresponding to external reinsurers. The insurer included in the income statement its best estimate for the loss retention: €176m.
Concerning the activity, Mapfre recorded 9M 17 total revenues of €21,292m (+1.6% yoy). Premiums recorded a 5.1% increase to €17,986m. The financial income reduced by 16.1% to €2,916m. The Non-Life segment posted a 4.7% improvement to €14,093m. The combined ratio stood at 98.7% vs. 97.2% in 9M 16 and the profitability of the Non-Life business dropped by 28.4% relative to September 2016 to €637m. Concerning the Life business, Mapfre posted 6.9% growth in premiums to €3,892m. The result of the Life business amounted to €569m, +5.4% yoy. The group’s 9M 17 net profit recorded a 22.3% decrease to €445m. The solvency II ratio stood at 206% including transitional rules. This ratio would have been 187% excluding the effects of these rules.
Mapfre recorded H1 17 total revenues of €15,438m (+5.4% yoy). Q2 17 was also positive with a 2.8% increase to €7,583m. Premiums recorded an 8.2% increase to €13,073m (+7.2% to €6,398m in Q2). H1 17 net profit was up 9.1% to €415m (+7% to €208m in Q2). The Non-Life segment posted an improvement of 7.8% to €10,256m relative to H1 16 (+12.3% to €5,038m in Q2). The underwriting result benefited from these good figures and amounted to €202m while the branch’s profit declined by 3.9% to €565m. The combined ratio stood at 97.2% vs. 97.5% a year before. The Life business recorded a 9.7% progress in premiums to €2,817m (-8.1% to €1,360m in the Q2) and the result stood at €427m, +13.3% yoy.
The Spanish company has a relatively comfortable position in terms of capital adequacy with nearly 87% of eligible capital in Tier 1 items. Mapfre’s capital ratio under Solvency II exceeds 191%, excluding the use of transitional measures.
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A number of REITs have the ability to thrive in current market conditions and thereafter. Not only do they hold assets that will remain in strong demand, but they have focus and transparency. The leases and underlying rents are structured in a manner to provide long visibility, growth and security. Hardman & Co defined an investment universe of REITs that we considered provided security and “safer harbours”. We introduced this universe with our report published in March 2019: “Secure income” REITs – Safe Harbour Available. Here, we take forward the investment case and story. We point to six REITs, in particular, where we believe the risk/reward is the most attractive.
Companies: AGY ARBB ARIX BUR CMH CLIG DNL HAYD NSF PCA PIN PXC PHP RE/ RECI SCE SHED VTA
With a new CEO, Amanda Blanc, Aviva’s shareholders could dream of a possible change in the group’s strategy, with a more focused insurance business. The new Chief has an opportunity to take painful decisions in a year where no one will require a high operating performance.
Companies: Aviva Plc
The Native Antigen Company (“NAC”) has been acquired by LGC for up to £18.0m – with the ongoing COVID pandemic highlighting the value of knowledge and execution in the infectious diseases space. Mercia invested in NAC via both its balance sheet and 3rd party funds. The exit represents a strong return for both sources of capital, validating complete connected capital to optimise value creation. For the balance sheet stake, the £5.2m proceeds represent a £2.5m gain on realisation (c.1.5% of our FY21e NAVps). Final Results will be announced next week, when we will review our forecasts. The shares are currently trading at a 45% discount to NAV (which is 20% cash). Today’s exit demonstrates justification for a much narrower discount, if not a premium, to conservative carrying values.
Companies: Mercia Technologies
Trading Well in Tough Market
Companies: Palace Capital
With the sale of The Native Antigen Company (NAC) for up to £18m in cash, Mercia expects to realise £5.2m (1.2p per share) for its 29.4% stake. This exit delivers another significant milestone in management’s strategy to achieve an evergreen funding model. Management has confirmed that the group is profitable on a day-to-day basis following the acquisition of the NVM VCT management contracts (NVM) in December 2019. NVM, together with additional allocations from the British Business Bank (BBB), has lifted AUM to c £800m. Management’s three-year strategy targets a sustainable, evergreen balance sheet with AUM of £1bn in FY22, with future investment commitments met through existing cash resources and realisations without the need for further recourse to the markets. Despite real progress, Mercia trades at 0.69x its September 2019 NAV, with the fee-earning funds business as further upside, not captured in an NAV-based calculation. FY20 results are due on 14 July 2020.
HgCapital Trust’s (HGT) 12-month NAV TR to end-March 2020 was a solid 13.8% despite the COVID-19 market downturn in March 2020 (ytd NAV performance since end-December 2019 was a 6.2% decline). The coverage ratio reached a historically low level (13% vs three-year average of 53%) after HGT notably increased its investment activity and commitments in Q120. However, a significant part of these new commitments will not be drawn in the near term. The board continues to review its future funding arrangements and may also opt out of a new investment without penalty across all funds. HGT’s portfolio focus is on the resilient software and technology sector and the manager expects a limited direct earnings impact on its portfolio from the COVID-19 pandemic.
Companies: Hgcapital Trust
Accelerating activity in to FY21
Companies: Manolete Partners
Hot on the heels of the Architas acquisition – announced 1st July, Liontrust has issued in line final results (£38.1m adj. PBT vs £38.3m consensus, 24p second interim dividend). An accompanying trading update also confirms that AuM bounced back in Q1 as markets recovered and net inflows were sustained at a record £971m for the quarter. The Architas acquisition – once completed later this year – stands to drive Liontrust through the £25bn AuM mark and bolster the existing multi-asset product offering and wider appeal to the current client base. As joint corporate broker, we have withdrawn forecasts pending the approval of the acquisition at the forthcoming general meeting.
Companies: Liontrust Asset Management
Beijing’s forced implementation of the Hong Kong security law threatens the region’s financial hub status. This is a potential game-changer for HSBC but it does not seem to come as a surprise for the group as confirmed by the acceleration of its investments in China or its efforts to secure a leading position on the RMB.
Ground Rents Income Fund (GRIO) has today released its interim results for the period ending 31 March 2020. The fully diluted NAV is 110.1p down marginally from previous NAV of 111.3p as at 30 September 2019 year-end. This valuation included a material valuation uncertainty clause as a result of the COVID-19 pandemic, which has subsequently been removed since the period end for long dated ground rent valuations given the defensive nature of the income streams and continued market/transactional activity. The latest valuation represented a decrease on a like for like basis of £0.36 million or -0.3%. Two Interim dividends were paid during the six-month period ending 31 March totalling 1.98p, and a further dividend of 0.99p has been declared today (ex 16 July / payable 10 August). Dividend cover excluding the non-recurring litigation costs on Beetham Tower was 90%. Assuming a full year dividend of c4p this puts the shares on a flat yield of 4.9% and a discount of 26%.
Companies: Ground Rents Income Fund
Burford has announced its results for 2019. As previously indicated, these were lower than in the previous year. Revenue fell 17% from $430m in 2018 to $357m. Profit after tax, on Burford’s basis, declined 31% from $329m to $226m. As announced earlier, there will be no final dividend so only the interim dividend of ¢4.17 was paid for FY19. Unusually, Burford has also released a trading update for early 2020 alongside its main figures. Court results and arbitral awards have been obtained that would generate some healthy profits. Most notable is $200m in income ($300m in cash receipts) regarding which further legal review is unlikely.
Companies: Burford Capital
Gfinity plc* (GFIN.L, 1.625p/£14.0m) | Blackbird plc* (BIRD.L, 16.5p/£55.4m) | Tern plc* (TERN.L, 11.5p/£31.1m) | The Panoply Holdings (TPX.L, 72.5p/£39.9m)
Companies: GFIN BIRD TERN TPX
ICGT, the 39-year listed private equity (PE) investor, has delivered a total NAV return of 178% over 10 years (comparable FTSE All Share return 61%). Since Intermediate Capital became the manager in 2016, ICGT has earned mid-teen p.a. underlying returns every year. This has been achieved by leveraging the attractive PE market with incremental manager synergies. It has a concentrated portfolio of “high-conviction” investments (19% p.a. average returns over five years, 42% of portfolio, defensive growth focus) and a diversified third-party PE funds book. ICGT manages over-commitment tightly. The 33% discount to NAV is above peers.
Companies: ICG Enterprise Trust
Numis’ update for Q320 was positive, reflecting both the need for equity funding in the market and the strength of the group’s franchise as well as its ability to deal with current operating constraints. Subject to the market background in its final quarter, we now expect Numis to achieve a full-year result in line with or ahead of the high end of our previous scenario range.
Companies: Numis Corporation
PetroTal (PTAL LN/TAL CN)C; Target price £0.45: 1Q20 results/Bretaña expected to restart in July – 1Q20 financials are in line with expectations and 1Q20 production had been reported previously. At the end of 1Q20, current trade and other payables had been reduced to ~US$45 mm compared to ~US$55 mm at YE19. Most importantly. PetroTal continues to expect the Bretaña field to be re-opened this month. The contingent liability with Petroperu is estimated at US$25 mm at the current oil price and the company has entered into a financial swap for 0.46 mmbbl of oil with an ICE Brent reference price of US $40.58/bbl to cover the upcoming sale by Petroperu at the Bayovar port. This is a recovery story that we continue to like. It offers a combination of value, production and cash flow growth and reserves upside. We anticipate that the imminent reopening of the field with be an important catalyst to the share price.
i3 Energy (I3E LN): Reveals takeover target in Canada | Maha Energy (MAHA-A SS): Production update | Aker BB (AKERBP NO): 2Q20 update in Norway | Energy (RRE LN): Recommended offer by Viaro Energy | Spirit Energy: Dry hole in Norway | Enwell Energy (ENW LN): Ukraine update | JKX Oil & Gas (JKX LN): 2Q20 update in Ukraine and Russia | Pharos Energy (PHAR LN): Operating update in Egypt and Vietnam | Sound Energy (SOU LN)C: Terms of Moroccan licence renegotiated | Tethys Oil (TETY SS): June production in Oman | Victoria Oil & Gas (VOG LN): Gas sales contract with ENEO in Cameroon terminated
EVENTS TO WATCH NEXT WEEK
14/07/2020: Aker BP (AKERBP NO) – 2Q20 results
15/07/2020: Premier Oil (PMO LN) – 1H20 update
13-17/07/2020: GeoPark (GPRK US) – 2Q20 update
Companies: I3E MAHAA JKX PHAR EQNR AKERBP ENI HUR PTAL REP RRE SOU TPL VOG OMV