Friday, 6 March 2015

QBE: Still cheap after 20% ytd rise

QBE shares are up 20% YTD after strong second half performance and firm 2015 guidance. As I wrote earlier in July and October 2014; QBE was going through transition which gave investors an opportunity to buy shares at decade low price. I continue to believe stock has more legs to reach it's intrinsic value; question is when? Is it worth waiting? To answer these questions, lets look at potential upside for the stock from current price of $13.43. My calculation for intrinsic value is as follows:
  • Net earned premium: 13B
  • Normalised Combined ratio: 0.92
  • Underwriting profit: 1.04B
  • Investment Assets: 30B
  • Normalised investment yield: 4% (conservative assumption)
  • Investment Income: 1.2B
  • Pretax Earning: 2.24B about 2.8B in AUD (AUD @ 0.8)
With modest 10x multiple, intrinsic valuation will be 28B; about $20 per share. Current market cap is 18.2B @$13.43. QBE still has good 50% upside from current level. Other way of valuing insurance company is through float, I wrote earlier in July - QBE float is $16-17. 

Looking at both the valuation method, valuation range is between $17-$20. I believe it will take 2-3 years for stock to reach these level. Meanwhile, patient investor can keep pocketing 2.5% dividend yield. Just to put the potential upside in perspective with historical valuation. At its peak before GFC, QBE was trading at $34. During that time investment yield was 5-6% and earned premium was lower than it's today.

I'll leave investors with quote from Warren Buffet "You don't make money dancing in and out of the market, you make money waiting". I strongly believe QBE is one of those investment. 

P.S: For US investor, you can buy QBE ADR. Ticker: QBIEY