Direct Line Insurance Group PLC

United Kingdom-based Direct Line Insurance Group Plc (DLG) is a general insurance company. The company, along with its subsidiaries, provides a range of personal and commercial non-life insurance products. The company differentiates its business in four operating segments: Home, Motor, Commercial and Rescue and other personal lines.

On 8^th November 2019, the company will announce the trading update for the third quarter of 2019.

Recent News
On 16^th September 2019, the company announced the appointment of Tim Harris as a Chief Financial Officer and will join the Board as an Executive Director.

Financial Highlights (for the six months ended 30 June 2019, £million)

(Source: Interim Reports, Company Website)

During the six months under consideration, in-force policies from direct-own-brands increased by 2% to 7,155k against the year-ago period. The gross written premium from direct-own-brands declined by 2.4% to £1,072.2m in H1 FY9 from £1,099.0m in H1 FY18, driven by lower investment return and reduction in the underwriting profit. Return on tangible equity stood at 20.9% in H1 FY19 against 21.9% in H1 FY18. The company's combined operating ratio was 92.5% in H1 FY19, an increase of 0.4%, while the expense ratio increased to 24.5% in H1 FY19 from 24.3% in H1 FY18. The company’s basic earnings per share declined by 11.3% to 14.9p/share in H1 FY19 against 16.8p/share recorded in H1 FY18. Interim Dividend per share rose by 2.9% to 7.2p/share against 7p/share recorded in H1 FY18. The robust capital position with solvency capital ratio after the interim dividend increased by 10pts to 180 per cent as compared to 170% at the end of H1FY18.

Share Price Performance

Daily Chart as at October-16-19, before the market closed (Source: Thomson Reuters)


On 16th October 2019, Direct Line Insurance Group PLC shares were trading at GBX 286.60 at the time of writing before the market close (at 8:55 AM GMT), down by 0.90% against the previous day closing price. Stock's 52 weeks High and Low are GBX 358.69/GBX 270.70. The company’s stock beta stood at 0.65, reflecting the lower movement of the stock as compared to the benchmark index.

Valuation Methodology


Conclusion
The group is improving its operational excellence and deployed management information tools and new data in the first half of 2019. The company is planning for additional product releases, comprising tradesperson products and transitioning Van on to the new system.

The company endures targeting a combined operating ratio of 93 per cent to 95 per cent for the year 2019. In the financial year 2019, the company anticipates making additional progress in reducing operating costs and is targeting operating expenses of below 700 million pounds.

The company anticipates a net investment yield of 2 per cent in 2019. In FY19, targeted return on tangible equity stood at 15%.

Company is successfully eliminating costs from the enterprise and making decent progress on transforming the company’s IT systems(like with the preliminary launch of the new Motor platform). These are designed to reinforce the abilities substantially, to improve client experience and to enable them to be more competitive.

Keeping in mind healthy prospects of the group, and supported by valuation done using the above method, we have given a “BUY” recommendation at the current price of GBX 286.60 (as on 16th October 2019, before the market close) with single-digit upside potential, based on the 12.15x Industry Average NTM Price/Cash Flow multiple (approx.) on the FY19E cash flow per share (approx.).
 

Gulf Keystone Petroleum Ltd

Gulf Keystone Petroleum Ltd (GKP) is a holding company, which operates in the Kurdistan Region of Iraq and is engaged in oil and gas exploration and production. The company operates one of the major onshore developments, the Shaikan oil field, which has an existing production capacity of 40,000 barrels of oil per day and the company proposes to expand it to 55,000 barrels per day. The company is based in Hamilton, Bermuda and is listed on the London Stock Exchange.

Recent News
On 16^th October 2019,the company confirms that a $21.5 million ($16.8 million net to GKP) of gross payment has been obtained from the Kurdistan Regional Government.
On 9^th October 2019,the company announced the purchase of ordinary shares on 8th October 2019, the group's share buyback programme of US$25 million as announced on 8th July, 2^nd and 10^th September 2019 were completed.

Financial Highlights (six months ended 30 June 2019, US$ million)

(Source: Interim Report, Company Website)

In the first half of 2019, the company’s gross production stood at 29,362 bopd against the 31,861 bopd in H1 FY18. During H1 of 2019, the average production rates were influenced by wells being off-line for workovers and good maintenance, in addition to the proposed shutdown of PF-1 to install facilities as part of the 55 thousand bopd expansion project. For the first half of 2019, the company’s reported revenue decreased to $95.6 million as compared to $116.2 million in H1 FY18, due to a lower Brent price and production. EBITDA reduced by 4 per cent to $59 million in H1 FY19 against the $61.6 million in H1 FY18. Profit after tax declined to $24.2 million against the same period in 2018. Net capital investment in Shaikan stood at $32.4 million, an increase from the previous year same period data. Net cash for the H1 FY19 increased to $198.3 million against the $117 million in H1 FY18. In H1 FY19, the equity ratio declined to 68%, and the opex rose to $3.9/bbl.

Share Price Performance

Daily Chart as at October-16-19, before the market closed (Source: Thomson Reuters)

On 16th October 2019, Gulf Keystone Petroleum Ltd shares were trading at GBX 201.68 at the time of writing before the market close (at 10:33 AM GMT), down by 0.89% against the previous day closing price. Stock's 52 weeks High and Low are GBX 277.17/GBX 164.75. The company’s stock beta stood at 1.3, reflecting the higher movement of the stock as compared to the benchmark index.

Valuation Methodology


Key Risks
Political, social and economic instability, Disputes regarding title or exploration and production rights, HSSE risks, Corporate social responsibility risks, Field delivery risk, Liquidity and funding capability risks, Export payment mechanism risk, and Commodity prices risk.

Conclusion
The region where the company operates has a history of political and social instability, which represents a major risk to the company. Uncertainty also arises from the risk of changes in leadership, which might affect the availability and accessibility of infrastructure, allowing the Group to sell oil to export markets. This might affect profitability. Also, the group is highly exposed to oil prices volatility globally; any unfavourable turn may adversely affect the Group’s cash flows and asset valuations. Near-term production guidance for the financial year 2019 has been decreased.

Based on the above rationale, we recommend investors to keep a "Watch" on the stock at the closing price of GBX 203.50 (as on 15th October 2019), with support from few catalysts needs to be evaluated at a later stage.
 
*All forecasted figures and Peers information has been taken from Thomson Reuters. Currency exchange rate taken for 1 USD = 0.782276 GBP.

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