Oge
The NSE All-share index is down by 9.5% on a Year-to-Date with this month’s performance showing that the path to recovery isn’t in sight, -3.8%.
This should come as no surprise because a lot of factors are currently adding up to the bearish trend, one of which is the attractive yields on fixed income securities, although still offering negative return but has improved when compared to the average yield on similar securities a year ago.
I am anticipating the next bull run in at least 1-2 years, that’s if the negative sentiments as reflected on the technical chart setup remains intact.
I know this isn’t good news to short term traders in the Nigeria stock market but I feel you may leverage the few stocks that are benefiting from economic trend to grow your portfolio and beat the market index.
One stock I have repeatedly mentioned in my Whatsapp group at the beginning of this year that generated 35% ROI in my trading portfolio is Seplat, an upstream oil and gas company that’s well-positioned to reap the benefit of the oil sector recovery.
Click here to watch my recommendations on SEPLAT Stock before the share appreciations.
The oil stock has cleared my N600 sell target but I sold at N680.
Breaking New: We now have live trading chatroom for stocks, crypto, FX, oil and other securities, this is where I will be spending my time as it gives me more time to discuss all that’s happening in the financial market on one platform – join us here at NaijaTradingRoom.com
Back to my recommendation, LOL!
Now I have another stock pick for everyone, this time it’s an insurance stock that promises big returns based on the volume of shares traded and improving fundamentals.
Mutual Benefit Insurance Stock:
Fundamental Analysis
In its 2020 financial report, the company generated a net premium income of N16.01b compared to N16.2b in 2019, this looks like an outperformance when you factor in the massive disruption of Covid-19, you would have expected the company to lose out on her premium income amidst the pandemic but when you factor in fees and commission income of N746m which was significantly higher than N482m, the total underwriting income prints at N16.7b, the same match with previous comparable year.
Let’s look at the real business of insurance, is Mutual Benefit running a profitable life insurance business?
The business of insurance isn’t measured like a retail-based business, instead of using profit after tax or EPS to pass judgements, I prefer the metric that helps me track their operating results because most insurance companies are only using the income from extraordinary activities to patch their wounds, so be wise.
The company paid total benefits and claim of N7.8b 2020 compared to N5.92 in 2019 which means that the claim ratio for these years is 0.48 and 0.36. This is based on the net premium income of N16.01 and N16.2 respectively.
What is The claims ratio, you may ask? it is the percentage of claims costs incurred in relation to the premiums earned. The claims ratio is equal to the claims rate divided by the risk premium rate. In summary, it tells you how much insurance is paying from the premium collected, the lower the figure, the better for shareholders or investors. It also means the company has a professional actuarial who are able to estimate the right premium based on assessed risks.
The next ratio is the expense ratio, how much is the company paying to generate and run her insurance business? We call this Underwriting expenses; it includes all expenses related to the business, such as actuarial reviews, inspections, due diligence, legal fees, and accounting fees. The goal for any company is to keep underwriting expenses as low as possible to have the highest net income possible.
Mutual Benefit paid underwriting expenses of N4.7b and N4.18 in 2020 and 2019 respectively. This implies an expense ratio of 0.29 and 0.25.
The ultimate essence of this analysis is to ascertain the combined ratio of the insurance stock; claim ratio plus expense ratio and any result that falls below 1 tells you the company is well run and managed by professionals.
In 2020, the company’s combine ratio is 0.77 (0.48+0.29) while 2019 was 0.61. In layman’s interpretation, it means management utilized 77% of all the total premium collected from policyholders to settle claims and finance its operation without touching the company’s money for the year while the remaining 23% is like FREE CASH, no wonder, cash flow from operative activities isn’t just positive but increased significantly.
You see the reason Mutual Benefit insurance is a profitable life insurance business.
Down to the bottom line, profit after tax increased from N3.8b in 2019 to N4.8, 33% growth while EPS went up by 11%, from 36k to 40k in the same period.
Technical Analysis:
Mutual Benefit stock had just bounced off the 20-day MA with the price already up by 7.5% and 65% in the last one week and 6-month respectively. The relative strength index has crossed 50 points from the bottom to 59 which means, we may see more buying interest in the coming weeks or month.
What’s my fair value?
I still maintain my usual 25% discount which I think factors in the rising risk of investing in local stock amidst insecurity, exchange rates and political instability. On a TTM of 40k, the stock looks like one that may appreciate to N1.4-N1.6 in the medium term.
The stock currently sells for 42kobo which is 100-250% below the real value, I’d advise you to set a modest exit target of 30-40% as a trader.
Disclaimer; the opinion shared is based on my personal research and analysis of the stock, kindly do your due diligence.
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