Load up on Hastings for cheap rating and 5.3% dividend yield
It’s time to go against the crowd and shop for bargain insurers
The market has fallen out of love with general insurance companies due to various market issues such as growing competition, falling premiums and rising cost of claims.
Despite this negative backdrop, we believe now could be a good time to go hunting for bargains in the belief that the bad news is now priced in.
One share that catches our attention is Hastings (HSTG).
Its shares are cheap, it has an attractive dividend yielding a prospective 5.3% and the business is focused on being profitable rather than chasing growth on thin margins.
The company’s value is down by nearly 20% since December 2017. Setbacks included a slight revenue miss for its 2017 results and greater payouts due to ice and snow in its first quarter to 31 March 2018. However, the company reiterated it is on target to meet its 2019 objectives.
One of these targets is to hit 3m customers by next year; 2017 results revealed 2.6m customers. It has an estimated 7.3% share of the motor insurance market.
Berenberg analyst Ian Pearce says a 12% share price fall following a small revenue miss and operating earnings beat at the full year results was unjustified.
‘Slightly lower growth in 2017 was offset by superior profitability, which we believe
can be projected forwards. Indeed, we believe these results exhibited the disciplined nature of the company’s growth strategy. This is why we prefer Hastings to some peers which have more reckless growth ambitions.’
Hastings has invested in its business in preparation of future growth. It should soon complete the implementation of Guidewire, its claims and underwriting platform. This will allow its legacy platform to be closed and remove dual operating costs, explains Pearce who believes Hastings has the best IT systems in its field.
Hastings added 292,000 net policies in 2017 versus an average of 299,000 over the past five years. While that understandably troubled the market, investors seem to have ignored the fact that profitability came in ahead of expectations.
‘We expect Hastings will
see increasing retention rates over time,’ says Pearce. ‘It has a relatively immature book of business which naturally has a higher propensity to churn. As its in-force book begins to mature, we expect retention rates to gradually increase to levels closer to listed peers.’
Using forecasts from Numis, Hastings is trading on 10.4 times 2019’s earnings. Nick Johnson, analyst at Numis, says the current valuation of Hastings is an ‘opportune entry point’ and we certainly agree. (DS)