Lancashire Holdings Ltd

Lancashire Holdings Ltd (LRE) provides services related to reinsurance products and global speciality insurance in London and Bermuda.  The company mainly focus on direct, short-tail and re/insurance risks under five business lines in which the company operate. The five business lines include Lloyd’s, aviation, energy, property and marine. The company presently have an employee base of 215 professionals.

On 7^th November 2019, the company will announce the Q3 FY2019 Earnings Release.

Financial Highlights (H1 FY2019, $ million)

(Source: Interim Report, Company Website)

For the first half of the financial year 2019, the company’s Gross premiums written were up by 9.45 per cent to $429.6 millionfrom $392.5 million in H1 FY2018. The Net premium written was down by 4.87 per cent from $234 million in H1 FY2018 to $222.6 million in H1 FY2019. The company’s net revenue stood at $240 million in H1 FY2019 versus $234.1 million in H1 FY2018. The PBT (Profit before tax) for H1 FY2019 stood at $40.5 million as against $74.9 million in H1 FY2018. The company’s profit after tax was $39.1 million in H1 FY2019 versus $75.8 million in H1 FY2018. The company’s diluted earnings per share were $0.19 in H1 FY2019 versus $0.38 in H1 FY2018.

In H1 FY2019, the fully converted book value per share stood at $5.52against the $5.70 in H1 FY18. The company generated an RoE (return on equity) of 6.9 per cent with a combined ratio of 86.6 per cent.

Share Price Performance

Daily Chart as at September-17-19, before the market closed (Source: Thomson Reuters)

On 17th September 2019, Lancashire Holdings Ltd shares were trading at GBX 719 at the time of writing before the market close (at 8:24 AM GMT), up by 0.07 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 732/GBX 492.33. The company’s stock beta was 0.56, reflecting the lower movement of the stock as compared to the benchmark index.

Valuation Methodology

*Peers: Direct Line Insurance Group PLC, RSA Insurance Group PLC, Hastings Group Holdings PLC, and Hiscox Ltd.

Conclusion
The company’s financial performance has declined for the H1 of the financial year 2019.The company’s disciplined underwriting approach is bringing the momentum in the form of new business for the period. The company is looking forward to new opportunities in the Florida market. As the company operates in multiple geographic regions, its operations are impacted by the political risks prevailing in that particular market.

The company’s top-line performance and bottom-line performance has declined for the current period. The company will be impacted by the uncertainties created by the ongoing Brexit. The company produced a return on equity of 6.9 per cent with 86.6 per cent of combined ratio. The company has experienced some adverse developments in the year 2018. The investment strategy remains relatively moderate and the investment portfolio is well-positioned with a total investment return of 3.2 per cent.

The group is trading near its 52-week high, suggesting that the upside potential might be limited, and the company can face stiff resistance at the current level.

Based on the headwinds and supported by valuation done using the above method, we have given an "AVOID" recommendation at the closing price of GBX 718.50 (as on 16th September 2019).
 

NAHL Group PLC

United Kingdom-based NAHL Group PLC (NAH) is involved in consumer marketing business aiming at the UK consumer legal services (CLS) market. The group's operating segments include Critical Care, Personal Injury, and Residential Property.

Financial Highlights (H1 FY2019, £million)

(Source: Interim Reports, Company Website)

In H1 FY2019, the company’s revenue increased by 3.9 per cent to £25.8 millionas compared with the corresponding period of the last year, due to an increase in personal injury and critical care segments but a massive decline in residential property division. Underlying operating profit was up by 1.7 per cent to £6.5 million in H1 FY2019 against the £6.4 million in H1 FY18, with £0.5 million of planned start-up losses of new ABS law firm, NAL (National Accident Law). Before these losses, underlying operating profit surged by 10.6 per cent to £7 million against the same period in 2018. Profit before tax, after exceptional costs, declined to £4.6 millionas compared to £5.3 million in H1 FY18. Basic earnings per share reduced to 3.4 pence against the 8.2 pence in H1 FY2018 and are in line with the Board’s anticipations. This reflects the Shifting balance of case allocation between Legal Services business unit and panel law firms, in line with the strategy and continued development of ABS structures. In the first half of 2019, cash generation from operations increased to £3.5 millionagainst the £1.3 million in H1 FY2018. Interim dividend per share decreased to 2.6 pence against the 3.2 pence in H1 FY18. Net debt was almost flat at £17.6 million in H1 FY19.

Share Price Performance
 
Daily Chart as at September-17-19, before the market closed (Source: Thomson Reuters)

On 17th September 2019, NAHL Group PLC shares were trading at GBX 115 at the time of writing before the market close (at 9:47 AM GMT), down by 8 per cent against the previous day closing price. Stock's 52 weeks High and Low are GBX 129/GBX 73. The company’s stock beta was 0.47, reflecting the lower movement of the stock as compared to the benchmark index.

Conclusion
The company had shown decent financial performance for the first half of the financial year 2019. Despite the decline in bottom-line performance, the top-line performance has improved for the period.

The company operates in a challenging environment which requires continuous investment, sometimes at the cost of profitability, to stay ahead of competitors. Presently, the company is trading near its 52-week High, raising doubts at its upside potential at the current price level.

The group do not anticipate a noticeable increase in the market conditions experienced by the Personal Injury or Residential Property divisions. Conditions within the residential property market remain challenging.

The business operations are impacted by the uncertainties created due to the political and macro- economic factors. Being a media company, the NAH needs to invest heavily in innovation and system maintenance and, any failure to do so will impact the brand royalty and may affect the company’s financial performance.

On the basis of above headwinds, as discussed and supported by valuation, we recommend investors to “Avoid” taking a fresh position on the stock at the closing price of GBX 125 (as on 16th September 2019).
 
*All forecasted figures and peers have been taken from Thomson Reuters. Currency exchange rate taken for 1 USD = 0.80603 GBP.

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