Aviva Plc – Strong Solvency and liquidity, with reducing debt leverage

Aviva Plc (LON: AV.) is a multinational composite insurer group. It has a strong international presence in Europe, Canada and Asia.

Rationale for Valuation – Buy at GBX 297.70

• The loss ratio and expense ratio recorded by the Company in the past three years were considerably below the industry median.
• As per the valuation metrics, EV/Sales, Price/Earnings, Price/Cash Flow and Price/ Book Value multiples of the AV are currently lower as compared to the corresponding multiples of the Insurance industry. It reflects, shares are undervalued as compared to the industry.
• In the last six months, the Company has delivered a decent return of ~21.34%, which was higher as compared to the FTSE 100 Index.
• Fitch affirmed “BBB+” Long-term credit rating in May 2020, with a stable outlook on AV.
• From the technical standpoint, shares were trading well above the short-term support level of 50-day (GBX 286.40) simple moving average price, which reflects an uptrend in the stock.

Key Risks

• The Company expects business performance to be disrupted by capital market volatility and economic headwinds.
• The legislative changes and new entrants can disrupt the market environment.
• Acquisitions to match rapid transformation may increase integration risks and expected synergies may not be achieved.

Recent News

On 11 September 2020, the Company has agreed to sell a majority stake in the Aviva Singapore.

Financial Highlights (for the six-month period ended 30 June 2020 (H1 FY20), as on 6 August 2020)

(Source: Company Website)

• The Company delivered a strong financial performance in H1 FY20, with a strong financial position and robust operating profit of £1.2 billion.
• It witnessed strong solvency and liquidity position, with a decrease in debt leverage.
• Led by higher premium ceded to reinsurers for the period, net earned premium declined to £13 billion.
• The Board has declared a 6 pence second interim dividend per share and will review the 2019 final dividend and the long-term dividend policy in the fourth quarter of the current year.

One Year Share Price Chart

Daily Chart as of 17 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Book Value Approach (NTM) (Illustrative)

Conclusion

The Company has strong fundamentals with a robust and resilient balance sheet. The Group remains focused on operational fundamentals and enhancing customer to drive better efficiency, improved returns, and cash-flow. AV has responded well to challenges due to covid-19 and is well-positioned to offer reliable service, convenient and good value to customers. The Group is cautious in managing capital and businesses resources.

The Company expects the outlook to remain uncertain in the near term and will make it hard to deliver profitability targets and growth. Overall, the Company has a strong financial position, excellent partners and the swift operational response to the COVID-19 pandemic. This will smoothly navigate the short-term period to stay strong in the long run. The stock made a 52-week low and high of GBX 205.70 and GBX 439.40, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Aviva at the current market price of GBX 297.70 (as on 17 September 2020 before the market close at GMT 11:09 AM), with lower double-digit upside potential based on 0.80x Price/NTM Book Value (approx.) on FY20E book value per share (approx.).

Ashmore Group Plc – Operating with Strong Cash Generation

Ashmore Group Plc (LON: ASHM) is a FTSE 250 Index listed Investment Manager, which provides investment opportunities to participate in Emerging Markets.

On 14 October 2020, the Company will announce the Q1 AUM Statement for the financial year 2021.

Rationale for Valuation – Buy at GBX 372.00

• The return on equity (ROE) recorded by the Company in the past three years was considerably above the industry median. In FY20, the ROE was 21.4%
• Also, it has decent fundamental metrics as it has maintained a Net margin above 50% for the last three years.
• The Company recorded a lower debt-equity ratio of 0.01x (FY20) against the industry median, which reflects that ASHM is less leveraged as compared to the industry.
• In the last two years, the Company has delivered a decent return of ~2.64%, which was higher as compared to the FTSE 250 Index.
• From the technical standpoint, 14-day RSI stood at 30.64, which is supporting the upside movement.

Key Risks

• Long-term downturn in Emerging Markets fundamental could impact the profitability and balance sheet position.
• The lower performance amid market volatility could reduce assets under management, which can further lead to reputational damage and dissatisfied clients.
• The COVID-19 virus had a profound effect on societies, economies and markets across the world, and there remains significant uncertainty about the future impact.

Financial Highlights (for the year ending 30 June 2020 (FY20), as on 11 September 2020)

(Source: Company Website)

• The Company delivered a solid financial performance in FY20, with an increase in net revenue of 5% year-on-year, adjusted EBITDA of 10% year-on-year and diluted EPS of 3% year-on-year.
• In FY20, AuM fell by 9% year-on-year driven by a negative market performance of US$8.1 billion. However, the average assets under management increased by 11% year-on-year.
• The Company has a strong balance sheet, with financial resources of approximately £700 million and around £500 million of cash. Ashmore has no debt.
• While there are early indications that markets began to recover in the final quarter of the financial year, the snapshot at 30 June 2020 shows 17% over three years.

One Year Share Price Chart

Daily Chart as of 17 September 2020, before the market close (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price/Earnings Approach (NTM) (Illustrative)

Conclusion

In the last quarter of 2020, investment performance was positive quarter-on-quarter for equities, fixed-income, and multi-asset themes. Moreover, the lockdown easing combined with fiscal and monetary stimulus have improved the trading from the levels experienced in March 2020. Although the global macroeconomic outlook is still uncertain; however, Emerging Markets are relatively less likely to suffer than the developed economies. The balance sheet strength is reflected in their high-quality financial resources and no debt position. The stock made a 52-week low and high of GBX 281.80 and GBX 581.50, respectively.

Based on the decent growth prospects, and support from the valuation as done using the above method, we have given a “Buy” stance on Ashmore Group at the current market price of GBX 372 (as on 17 September 2020 before the market close at GMT 3:11 PM), with lower double-digit upside potential based on 17.20x Price/NTM Earnings (approx.) on FY21E earnings per share (approx.).

*All forecasted figures and Peer/Industry information have been taken from Refinitiv, Thomson Reuters.

*Dividend Yield may vary as per the stock price movement.

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