Adamjee: Downward revision in earnings

Following the one-off heavy provisioning in three quarter 2011, we have trimmed down our 2011E EPS for Admajee Insurance (AICL) by 14 percent to Rs5.6 per share. The stock has underperformed KSE 100 by 9 percent ever since the company announced its 9 Months (January to September) 2011 financial results while so far in 2011 it has underperformed by 42 percent. Based on our sum of the parts target price of Rs54, we maintain ‘Hold’ stance on Adamjee Insurance at current levels.

During 9-month 2011, AICL posted net profit of Rs370mn (EPS Rs3.0) as compared to earnings of Rs133mn (EPS Rs1.1) same period last year. Thanks to lower claim ratio (68 percent) than last year (72 percent), company’s core underwriting business posted a growth of 60 percent to Rs356 mn. Last year due to severe floods company’s core business remained depressed especially in 3Q2010. Apart from core business, investment income remained healthy which grew by 179 percent to Rs935mn.

However, during 9M2011, company’s general and admin expenses grew by stunning 115 percentto Rs907 mn. This is primarily due to one time debt related provisioning of Rs350mn (Rs1.8 per share after tax) in 3Q2011. As per the management, this provisioning is related to premiums which were due but not paid to the company. According to the management, the provisioning is a one timer which were related to few clients and thus the issue is now been settled.

The major chunk of the company’s investment is concentrated in equities. Of Rs11.3bn estimated market value of investments more than Rs8.7bn (77 percent weightage) is invested in stock market with residual investment in fixed income and bank deposits. Within the stock market exposure, the investment is skewed towards its group companies, particularly MCB that accounts for 47 percent of the company’s equity investment.

For valuing AICL equity portfolio value, we have applied 60 percent discount to market value. This is based on our study ( refer our report on August 02, 2011 ) in which we highlighted that investors demand on an average 60 percent discount to the portfolios invested in stocks. Thus, our portfolio value for AICL is arrived at Rs 50 per share which includes our adjusted equity portfolio of Rs3.5bn (Rs28/share).