Metropolitan, one of South Africa’s top four insurers, is currently enjoying a strong run of popularity among the investment community, reflected in both the performance of its share price, which has strongly outperformed the rest of the insurance sector so far in April, and rising trading volumes.
Judging by the company’s ratings, the share is likely to post further good gains in the months ahead.
Metropolitan focuses largely on the middle- and lower-income segments of the South African market, and put in a strong performance in its 2003 financial year to the end of December by succeeding in growing its new business volumes — new business annual premium equivalent in its retail business rose 20% — while keeping costs contained.
Since April 1, Metropolitan’s share price has gained 9% or 65 cents to trade at R7,80 on Thursday, approaching its 12-month high of R8,10 achieved on February 23. By comparison, the FTSE-JSE Insurers Index (J084) has gained only 0,03%, or 312 points.
At the same time, trading volumes on the JSE Securities Exchange South Africa have risen from a daily average of about 500 000 in 2003, as well as January and February 2004, to about two million since mid-March.
According to Metropolitan’s general manager for group finance Tyrrel Murray, the higher volumes could possibly be attributed to heightened interest triggered by the company’s excellent financial results released on March 10, combined with the subsequent positive analysts reports and the international investor road show undertaken by Metropolitan management in early April.
Murray also reports that Metropolitan launched its first unlisted American Depository Receipt (ADR) in the United States market at the beginning of January as a means of attracting US investor interest and boosting share liquidity. However, as none of the ADRs had yet traded, this was not a source of the higher trading volumes.
The ADRs are sponsored by the Bank of New York, and trade in a ratio of 10:1, so that when an investor buys one Metropolitan ADR in the US, it is equivalent to purchasing 10 Metropolitan shares in South Africa. Metropolitan has not yet begun marketing the ADRs.
According to the I-Net Bridge consensus forecast of seven analysts, Metropolitan’s share is rated a “buy”, with only one bank rating it a “sell” and one a “hold”.
Investec Securities rates Metropolitan in its top 10 most attractive stocks over a 12-month period, forecasting a 35% gain in its share price to R10,04. BoE Private Clients, meanwhile, is recommending it as one of its top six picks due to its relatively high dividend yield of 5,5%.
The insurer also ranks very highly in JP Morgan’s recent recommendations, with the global investment bank targeting a 28% rise in its price over the next year to R9,50. It says the share “offers excellent value”, with the possibility of a special dividend being paid over the next six to 18 months an added attraction.
According to Merrill Lynch’s Insurance Snapshot research report of April 5, Metropolitan remains a “buy” and the bank’s “favoured pick in the sector by some margin”. It is also targeting a 12-month share price of R9,50, which is believes is a conservative forecast.
In an interview with I-Net Bridge following the release of the company’s results on March 10, CEO Peter Doyle said Metropolitan expects to return some amount of excess capital to shareholders in the 2004 financial year, probably via some combination of a share buy-back programme, a special dividend and strong dividend policy. At the end of December 2003, the company had almost R3,9-billion in cash or cash equivalents.
“We plan to grow our business in one or two new areas that will require capital in 2004, and the regulator is considering changing the capital adequacy requirement ratios for insurers, but once we have decided how much capital we need to keep for these purposes, we plan to announce how any excess capital will be used,” the CEO explained.
“We will be considering a share buyback, a special dividend and maintaining a strong dividend policy, but it will probably be a combination of all of three.” — I-Net Bridge