We commence coverage on AXA with a Buy rating and a 12-month price target of €27. 2018 was a turning point for the Group in which we saw a corporate restructuring which we believe will continue to create value for shareholders in years ahead.
2018 was a pivotal year in AXA’s transformation journey, creating the #1 Property & Casualty Commercial lines insurer with the acquisition of XL Group and completing the biggest IPO of the sector with the listing of AXA Equitable Holdings Inc.
We are of the view that the transaction offers significant long-term value creation for our stakeholders with increased risk diversification, higher cash remittance potential and reinforced growth prospects.
AXA Equitable Holdings Inc.
In May 2018, AXA sold 49% of its holdings in AXA Equitable Holdings. AEH is AXA’s US Life insurance arm. AXA maintained a 51% shareholding in AEH. AXA intends to dispose of the remaining 51% holding in AEH but management is in no rush to do so.
Also the fact that management would consider selling out of the remaining 51% holding in AEH would continue to strengthen the cash position of the Group.
In September 2018, AXA purchased XL Group Ltd. XL specialises in property/casualty commercial lines and specialty risks. It has a strong presence in North America, Europe and Asia-Pacific. This move will enable the Group to become the #1 global P&C Commercial lines insurer based on gross written premiums.
Q4 2018 was an unusually severe fourth quarter in terms of natural catastrophes. Nonetheless, the group’s reported Solvency II coverage ratio at FY18 of 193% was marginally ahead of consensus expectations (192%) and in-line with the group’s previous guidance for a FY18 Solvency II ratio, post the closing of XL, of 190% to 200%.
Why we like AXA
• Attractive dividend yield – A 6% dividend yield is very attractive in a low interest rate environment. AXA has increased its dividend by 6% year-on-year to €1.34 per share. This equates to a full-year payout ratio of 52%, within the group’s new target pay-out range (50%-60%) suggesting that there is strong scope for dividend growth as earnings rebound (after the hit due to natural catastrophes in 2018).
• Strong Solvency ratio – The group’s reported Solvency II coverage ratio at FY18 of 193% was marginally ahead of consensus expectations (192%) and in-line with the group’s previous guidance for a FY18 Solvency II ratio, post the closing of XL, of 190% to 200%.
• AEH – interested in selling its remaining 51% holding in AEH. This will continue to strengthen the cash base of the group. Also, the cash can be used to continue to create value to shareholders in higher margin businesses
• AXA XL – through the addition of this business, the Group will continue to grow in its strong areas of business, focusing more on what it does best and improve margins in years ahead
• Strong Free Cash Flow – AXA has strong free cash flows that provide resources in the hand of the company to expand into new projects.
• Strong Brand Portfolio – Over the years AXA has invested in building a strong brand portfolio
• Successful track record of developing new products – product innovation
• Management have ambitious 2020 targets
• Strong distribution network – Over the years AXA has built a reliable distribution network that can reach the majority of its potential market
• Successful track record of integrating complimentary firms through mergers & acquisitions – It has successfully integrated a number of technology companies in the past few years to streamline its operations and to build a reliable supply chain
• Limited success outside core business – Even though AXA is one of the leading organizations in its industry it has faced challenges in moving to other product segments with its present culture.
• Natural catastrophe claims
We value AXA at 10x forward earnings and a discount rate of 11%, which is reasonable given the constancy of earnings growth. Based on our in-house earnings discount model we set a one-year price target of €27 per share.
This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri at Calamatta Cuschieri. For more information visit, www.cc.com.mt . The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.
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