Insurance stocks are the least followed stocks in the Nigerian stock market. But did you know that if you peruse the list of local penny stocks that doubled on a year to date basis, you will find one fairly priced insurance stock that is up by 106% with more room for capital appreciation.
In November 2019, I made a bullish call on this stock at 60kobo with over 50% upside potential to 80-90kobo, and right now this stock has helped shareholders pocket more than 100% between January and August, the same period a lot of stocksare trading at a year and all time low.
The stock is Law Union and Rock.
Why is the stock trending up?
The company reported a significant increase in operating profit to N181m in Q2, 2020 (from N43m in previous comparable period) which is like 320% growth while its profit after-tax expanded from N37m to N153m, representing 313% growth.
The growth in this bottom, despite a slight reduction in net premium income, was supported by a reduction in net benefits and claims by 44% to N232m. This shows that the company is taking a calculated risk on its insurance policies while benefiting from premium payments.
Another interesting line item on the Q2, 2020 result is the growth in Realized gain on foreign exchange. The company reported N30.5m against a loss of N4m recorded in the previous year. I also noticed this growth in the previous quarter (Q1), from N1.1m in 2019 to N8.2m in 2020.
CBN’s devaluation of Naira might have been a major push. Going forward, I think the second rate adjustment will help Law Union and Rock report higher net gains on FX in Q3 and Q4.
Law Union and Rock H1 profit and EPS are up by 81% and 80% respectively with net cash from operating activities of N645m (against N491m realized in 2019).
What’s the estimated price per share?
Based on its trailing twelve month EPS of 21k and inflation-adjusted of 20%, I think the stock is fairly priced at N1.05 which is 1% above its market price of N1.03.
With price to book value of 0.6, and price to earnings ratio of 4.9 the stock looks cheap relative to its growth potential.
I’d advise you buy at any price below 90k, this is what I consider a good bargain.