Prestige Assurance Plc

PRESTIGE ASSURANCE PLC

Ticker:                            PRESTIGENature of Business:      InsuranceLocation :                              Nigeria
Recent Price:           NGN0.40   52-Week High/Low: NGN0.51/0.38Estimated Fair Value:      NGN0.90-NGN1.01
Expected Return:      112.5%Consider Buy:                   Below NGN1.00Business Risk:            Average
Financial Risk:      AverageEconomic Moat:               WeakCorporate Governance: Average

Company Overview
PRESTIGE began operations as a Nigerian branch office of The New India Assurance Co. Limited in 1952. It was incorporated as a wholly-owned subsidiary of The New India Assurance Co. Limited in January 1970 and named The New India Assurance Company (Nig.) Limited. It, however, ceded 60% of the company to Nigerians following the enactment of the Nigerian Enterprises Promotion Act of 1977. The company's name was changed to Prestige Assurance Plc in September 1992.

The New India Assurance Co. Limited, Mumbai, now has 78.3% of the issued capital of PRESTIGE while Leadway Assurance Company Limited is in possession of 6.1% of its outstanding shares. PRESTIGE, a general insurer, provides personal, commercial, industrial and liability insurance products such as motor insurance, personal accident, burglary, marine, aviation and professional indemnity insurance products. 

Sir. Muftau Oyegunle has been appointed acting chairman of PRESTIGE following the resignation of the former chairman, Dr. Doyin Salami. Mr. Rajesh Kamble assumed office as the managing director in October 2021. Mr. Rajesh replaced Mr. Sarbeswar Sahoo who left office close to the end of the 2021 fiscal year. During the year under review, Mr. Gopalan Raghu retired from the board while Anjan Dey stepped down as director. Mr. Prasad Chandra and Mrs. Rekha Gopalkrishnan  joined the board as  non-executive directors

Investment Thesis
PRESTIGE enjoys the financial, research and technical support of The New India Assurance Co. Limited, an insurer established in 1919 with a strong presence in Asia and Africa.  The experience of PRESTIGE in the Nigerian insurance sector spans over six decades. It has reinsurance agreements with Africa Reinsurance Corporation, Aveni Reinsurer, NCA Reinsurer, Waica Reinsurer, Continental Reinsurance and Zep Reinsurer. These agreements have helped to prevent financial losses that may arise from the settlement of claims. PRESTIGE paid claims totalling NGN6.4 billion in the current year (2020: NGN3.3 billion) out of total claims of NGN8.3 billion (2020: NGN4.3 billion). But claims expenses only amounted to NGN2.4 billion (2020:NGN1.7 billion) owing to reinsurance recoveries. 

PRESTIGE has been able to sustain the turnaround that started in 2016. The company had accumulated losses between 2012 and 2015 due to its ability to grow its gross premium income.  The value of accumulated losses at the end of 2017 financial year stood at NGN347.3 million (2016:NGN776.5 million, 2015:NGN991.9 million).  The management succeeded in seeking approval to write off the accumulated losses in 2018 and that paved way for the resumption of dividend payment to the shareholders in 2020.

Earnings growth has been stable in the last five years.  Over the past five years,  gross premium and underwriting profit have expanded at a compound annual growth rate of  33.1% and 25.8% respectively.  Operating profit has gained 15.9% over the same period while Profit After Tax (PAT) has jumped by 25.4%. However, profit margins have been adversely affected by high claims and acquisition expenses. We are of the opinion that recapitalisation in the insurance sector will improve the capacity of the insurance companies to underwrite more policies, boost prompt claims settlement and confidence in the insurance business in the country.

The management of PRESTIGE has started pursuing new product development and investing in technology so as to sustain the improved performance. However, we are of the opinion that management needs to aggressively improve its distribution network owing to intense competition in the sector. 

PRESTIGE is trading below our fair value estimate ranging from NGN0.90 and NGN1.01 per share. We believe that if management does not relent on its efforts to grow the business, PRESTIGE would adequately compensate the patient investors with dividends and capital appreciation.

Valuation
PRESTIGE trades at 0.27  and 2.7 times average book value per share and earnings respectively. We believe that PRESTIGE is worth between NGN0.90 and NGN1.01 per share. It currently trades below our fair value estimate and, in our opinion, it presents a buying opportunity for investors. The expected return on the stock is 112.5%.

Financial  Overview
Gross premium income grew from NGN6.7 billion to NGN9 billion, gaining 33.8% between 2020 and 2021. Over the last three years, PRESTIGE has increased gross premium income at a compound annual rate of 24.3% compared to a  rise of 25.6% in the prior year. Investment and other operating income produced 8.4% of gross earnings compared to 9.2% in the year before. Premium and reinsurance commission generated 91.6% of gross earnings in 2021 compared to 90.8% in the preceding year. On average,  premium and reinsurance commissions have contributed 85.6% of gross earnings while 14.4% of gross earnings are attributable to investment and other operating income.    

PRESTIGE earned an underwriting profit of NGN801.7 million in 2021 which was 0.2% better than the performance in the previous year. It grew underwriting profit by 56.3% last year (2019: 13.6%, 2018: 34.4%). However, the underwriting profit made by the company was just 9% of gross premium income compared to a higher profit on the insurance coverage provided in the previous year (11.9%).  PRESTIGE had an operating profit of NGN733.5  million in 2021, up 6.1% from the prior year.  Profit Before Tax (PBT) added 6.8% to NGN732.2 million at 2021 year-end while PAT only gained 1.5% year-over-year. The operating profit margin decreased from 8.4% as at 31st December 2020 to 6.8% at the end of the following year. PBT margin was 6.7% compared to the previous year’s figure of 8.3%. Likewise, PAT margin declined from 8.2% to 6.3%. 

Shareholders' fund which has been growing uninterrupted in the past nine years peaked at NGN13 billion at the end of the year under consideration (2021). Total assets grew by 16.6% over the previous year. The company has paid down its debt; the debt outstanding as at December 2021 was NGN6.8  million. Total debt was less than  1% of both shareholders' fund and total assets. PRESTIGE is a low-geared company with ample operating profit to settle its debt obligations. . However, cash flow from operations could not settle interest obligations due to difficulty in generating positive cash flow by the company.

Business Risk
There is intense competition in the insurance sector in Nigeria. In addition, many Nigerians have yet to embrace insurance. This has a negative effect on earnings growth. The business has an inherent risk and the occurrence of risks may wipe out its profits.

Recommendation: Buy

In NGN thousands
Earnings Chart of Prestige Assurance Plc

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