We today re-initiate coverage on Ageas with a BUY recommendation and €34.5 TP. Despite recent years’ strong stock price performance, Ageas remains one of the cheapest EU insurance plays trading at 0.7x TBV. We see ample scope for a further re-rating as capital employed in emerging markets is set to exceed 25% by ‘15. Excess capital repatriation towards share-or debt holders could moreover lend additional support to the stock. With €2bn net cash in the holding, financial flexibility hereto is huge.
With €2bn of net cash sitting in the holding and solid buffers in most units, Ageas is one of the best capitalized EU insurers. The quality of the capital is moreover high (low leverage, intangibles).
A step up in dividendscombined with an exceptional distribution (super dividend and/or new SBB) would in our view unlock the most value.
The group is however prioritizing external growth projects which we deem a risk given its unproven M&A track record. A wise redeployment of capital towards its attractive Asian operations could however also unlock value as emerging market insurers trade at much richer multiples.
Given the high reliance on investment income and the rigid nature of the guarantees on its Belgian back book, interest rate exposure is high. We therefore deem the stock a good play on rising interest rates.
Cash flow generation of its mature life operations (ex Asia) is on the other hand a weak spot in the investment case as cash has been lagging earnings. FCF generation is nevertheless on an improving trajectory and FCFE yields currently stand at around 11% (adj. for the holding net cash position).