Karachi, July 26, 2023 (PPI-OT): AICL: PSX rally and dividend income expectations attract interest

We reiterate 'Buy' on Adamjee Insurance (AICL) over recent rally at PSX, alongside increasing expectations of potential increase in dividend stream of the company's investment portfolio. We tweak our SoTP value marginally upwards to Rs59, where Rs42 is contributed by AICL's investment portfolio.

A lion's share of ~40% to AICL's investment portfolio is contributed by MCB, where in the scenario of higher earnings and potentially higher dividend from MCB, AICL stands among bigger beneficiaries, holding almost 5% of MCB. We highlight, AICL holds 7% of PKGP and LPL each, where any scenario of outstanding circular debt settlement and one-time hefty dividends from respective IPPs would also benefit AICL.

AICL is currently at ~60% of the investment portfolio, reflecting remaining ~40% investment portfolio and the whole of the General Insurance business for no price. Additional value accretes from unlisted investments, Hyundai Nishat Motors and Security General, which adds another Rs9/sh or 15% to our SoTP (both investments at cost in current SoTP).

Investment portfolio value further expands in SoTP

We reiterate ‘Buy’ on Adamjee Insurance (AICL) over recent rally at the PSX. Our SoTP, previously valued at Rs57, slightly increases to Rs59 in the ongoing KSE100 rally, which has performed 12% so far in FY24 YTD. As out of the total AICL value, the investment portfolio contributes Rs42 (after 30% discount on listed companies), any change in the same reflects a material impact on AICL valuations. The remaining Rs17 pertains to its General Insurance business.

Even with the stock’s recent jump of 22% during the ongoing month, the market price barely reflects the partial value of the investment portfolio. This means an investor is currently getting the General Insurance business, in addition to future upside of Hyundai Nishat Motors and Security General Insurance Company Limited, for zero cost.

Further upside beyond cost of unlisted investments

We highlight that we have prudently incorporated value of Security General at cost at Rs2.6/share, while its valuations as disclosed in financials comes to Rs6.6/share, adding Rs4/share to our SoTP. In addition, Hyundai Nishat Motors is also added in our base case at cost of Rs3/share, vis-à-vis valuations of Rs7.9/share as per the company, an increment of Rs5/share to our SoTP.

Incorporating valuations of both unlisted companies as reported in AICL financials, our SoTP would jump by another Rs9 or 15% to Rs68. As per company disclosures, the valuations of both unlisted companies are based on terminal growth of 2% and discount rate of 21%+

MCB and IPPs to potentially increase dividends

A lion’s share of 42% to AICL’s investment portfolio valuations is contributed by MCB alone, and 10% is invested in the company’s unlisted group companies, with the rest 48% scattered in various listed companies. With projections of higher banking earnings and potential increase in dividends from MCB, AICL stands among the bigger beneficiaries, holding almost 5% of the bank. The current estimates of Rs24/share annual dividend from MCB amounts to Rs3.45 of AICL’s base case EPS of Rs7.74, reflecting the material impact MCB’s dividends has on AICL’s bottomline. An increase of every Rs5 would boost AICL’s earnings by Rs0.7/share, or ~10%.

We highlight, the company holds 7% of Pakgen Power (PKGP) and Lalpir Power (LPL) each, where any scenario of outstanding circular debt settlement and one- time hefty dividends from the respective IPPs would also benefit AICL. Dividend payout of every additional Rs5/share by both IPPs would result in incremental EPS of Rs0.65 (~8% to base case earnings). Our base case so far incorporates annual dividend of Rs2/share from each IPP. To recall, the government has recently made hefty payments to IPPs against its outstanding dues, from which PKGP received cash of Rs6.72/share, while LPL received Rs5.27/share.

Core operations dominated by Motor segment

We forecast the Net premiums to post a meagre 5-YR CAGR 5% and maintain the Claims ratio above ~60% and a combined ratio of 86%. The dominating sector would continue to be the Motor segment, contributing more than 60% to the total General Insurance business. The core operations are expected to contribute EPS of Rs3.01, translating justified P/E of ~5.5x. With investment income of Rs4.43, We expect CY23 EPS of Rs7.44, with DPS of Rs3.00 under our base case.

Any upside to earnings from higher dividends from investee company translating into AICL payout policy would be tracked closely by investors in our view.