NEM Insurance Plc Stock Valuation

NEM INSURANCE PLC

Ticker:                            NEMNature of Business:      InsuranceLocation :                              Nigeria
Recent Price:           NGN3.85   52-Week High/Low: NGN5.00/3.01Estimated Fair Value:      NGN4.71-NGN7.47
Expected Return:      72.3%Consider Buy:                   Below NGN5.90Business Risk:            Average
Financial Risk:      AverageEconomic Moat:               WeakCorporate Governance: Average

Company Overview
NEM Insurance Plc (NEM) is one of the leading insurance companies in Nigeria. It began as an agency of Edward Turner & Co. in 1948. It became a branch of NEM General Insurance Association Limited (London) 17 years later. The company was incorporated as a Nigerian company in 1970. Subsequently, NEM was privatised and its shares were listed on the Nigerian Stock Exchange in 1989.

Consequent upon its merger with Vigilant Insurance Company Limited, NEM jettisoned life insurance and focused on the general insurance business. It offers fire, marine and aviation, oil and gas, general accident, motor vehicle, liability and home protection insurance products through its branches in Nigeria. NEM   introduced agricultural insurance policy in order to take advantage of the opportunities in the Nigerian agricultural industry.

AFIG Funds (Mauritius) is the highest shareholder with an equity stake of 29.9% in the company. The company. NEM is an indigenous insurer with a board of directors that controls 55.7% of the company (2020: 55.9%). Dr. Fidelis Ayebae chairs the eleven-man board while Mr. Tope Smart, the chief executive officer, leads the management team. Messrs.  Sunday Adebayo and Momoh Odamah were named executive directors in December 2021.

Investment Thesis
NEM has total assets exceeding NGN30 billion and reinsurance treaties with WAICA Reinsurance Plc, African Reinsurance Corporation, Continental Reinsurance Plc and Swiss Reinsurance Company. Presently, motor and fire insurance have produced over 50% of gross premium income and over 40% of underwriting profit in the past four years. NEM stands to benefit from the implementation of compulsory insurance by the National Insurance Commission (NAICOM). This is expected to impact the company’s earnings positively.

NEM has introduced agricultural insurance policies such as multi-perils crop, poultry, fishery, livestock, and farm properties and produce policies. Gross premium income from agricultural insurance policies increased from NGN0.8 million in 2020 to NGN62.7 million in 2021. However, it produced an underwriting loss of NGN469.7 million in the year under consideration owing to a reinsurance cost of NGN628.7 million. It made an underwriting profit of NGN0.6 million in 2020 its first year of introduction. More spending on promotion should increase the adoption of the policies, and grow premium income and profits.

We believe that the successful recapitalisation as required by the regulatory authority would increase the capacity of the company to underwrite more policies and take advantage of the huge opportunities in the insurance sector as penetration is still low in the country. Investment in technology could increase its relevance in the digital economy, drive down its cost and increase revenue.

NEM has an average dividend yield of 6.5%; the Price to Earnings (P/E) ratio and Earnings Per Share (EPS) averaged 5.3 times and NGN0.43 respectively. When these are combined with a Price to Sales (P/S) ratio of 0.9 and a Price to Book (P/B) ratio of 1.1 at 2021 year-end, NEM is a bargain at the current market price of NGN3.85.

Valuation
The value of NEM is between NGN4.71 and NGN7.47 per share. Presently, the stock is trading below our fair value estimate. Therefore, we recommend a buy. A return of 72.3% is anticipated on the shares of NEM.

Financial Overview
Gross premium income has grown at a 3-Year Compound Annual Growth Rate (CAGR) of 22.8% while underwriting profit rose by 14.8% over the past three years. Premium income accounts for about 90% of gross earnings; fee and commission generates close to 3% of gross earnings while investment income is responsible for roughly 4% of gross earnings.

Motor insurance produced a gross premium income of NGN7.8 billion or 29.5% of total gross premium income in the 2021 fiscal year. Fire insurance had year-over-year growth of 35.8% in gross premium income to NGN6.4 billion.  Oil and gas insurance, which contributed 15.7% of the gross premium earned by NEM, achieved a 25.7% growth in gross premium income. Gross premium income from general accident insurance was NGN4.9 billion in 2021 which was 2% more than the previous year’s figure.

The company’s underwriting profit increased by 17% to NGN7 billion in 2021 compared to a 37.5% rise in the prior fiscal year. Though it accounted for 24% of the total underwriting profit, marine insurance produced the highest underwriting profit as a percentage of gross premium income ratio of 53.1% (2020: 26.6%). The underwriting profit from motor insurance of NGN3.8 billion was more than double the previous year’s performance. Oil and gas insurance and marine insurance witnessed underwriting profit increment of 267.5% and 201.6% respectively. Conversely, an underwriting profit of NGN1.2 billion from general accident insurance was tantamount to a 54.8% fall year-over-year. Both agricultural and fire insurance recorded underwriting losses in 2021.

The Profit After Tax (PAT) of NEM lost 12.8% in the period under review to close at NGN4.4 billion. Though it dropped 6 percent year-over-year, the PAT margin of 15.1% exceeded the 12-year average of 12.8%. Profit Before Tax (PBT) margin, which was 15.4% in 2021, worsened compared to the prior year’s figure. NEM’s underwriting profit margin shed 1% or 100 basis points year-over-year.

Both Return on Equity (RoE) and Return on Assets (RoA) of 23.8% and 14.3% respectively beat the 12-year averages of 16.9% and 9.3%. However, RoE and RoA were worse than what were achieved a year ago. Shareholders′ fund that stood at NGN18.4 billion in 2020 swelled to NGN22.9 billion at the end of the 2021 financial year. NEM produces positive cash flow and is not insolvent.

Business Risk
Stiff competition in the sector is a potential threat to NEM. Besides, there is no marked product differentiation and players find it difficult to build any lasting advantage over the competition.  Besides, the sector is highly regulated and it is prone to regulatory risk.

Recommendation: Buy

In NGN thousands
Earnings Chart of NEM Insurance Plc

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