Custodian Investment Rated Buy despite Weak Profit, Soft Upside
Samuel Banmeke, equity analyst at Meristem Securities, a Lagos-based investment banking firm has handed a buy recommendation on Custodian Investment Plc, for about 11% estimated upside potential.
Meristem’s analyst set N7.87 per share as the price target for the insurer with the expectation that earnings per share for 2022 will print at N1.87 at the year-end, a downgrade from its previous figure.
For about 11% upside potential, equity analyst recommended that investors should buy Custodian Investment shares. The company’s share price had peaked at N8.45 in the last 52 week and hit the bottom at N5.75 within the period.
In 2021 result, Custodian grew revenue but profit slipped amidst rising claim expenses by policyholders. However, the insurance company did well with underwriting revenue.
Pressures on top line dragged the insurance company’s profit margin downward and Meristem analyst Banmeke projected a below 10% growth in profitability for the current year.
Priced at N7.50 on Friday, the Nigerian stock market valued Custodian at N44.114 billion on 5.882 billion shares outstanding. In the financial year 2021, Custodian Investment Plc. recorded double-digit growth in gross revenue, up 14.23% year on year to N85.74 billion in 2021.
The performance was majorly propelled by 13.91% growth in the company’s gross premium income, supported by a 24.61% increase in the life business from the comparable period in 2020.
Sales from the property business segment declined by 30.17% year on year as shown in its audited report. Meristem analyst said this was as a result of decrease in revenue and earnings from its subsidiary (UPDC Plc.) in 2021.
Last year, following a binding agreement signed, Custodian Investment Plc acquired 51% interest in UACN Property Development Company. This qualified the property company as a subsidiary.
Explaining further, Banmeke noted that revenue from property business 0.96% contribution to total revenue remains insignificant and has minimal impact on the overall business of the firm.
In the period, claims expenses on the other hand surged 40.80% year on year to NGN20.18 billion, which analyst noted was influenced by huge claims payout from the life business during the period.
Thus, combined ratio worsened to 40.05% from 32.84% in 2020, depicting a weak operational efficiency during the period as underwriting expenses also increased 33.16% year on year.
Nevertheless, Meristem said underwriting performance in 2021 jumped 287.62% to N24.87 billion, supported by a significant reduction in provisions for life and annuity funds from a loss of N32.79 billion in 2020 to a profit ofN4.83 billion.
“The reduction in the life and annuity fund was due to the uptrend witnessed in the general fixed income environment. While we expect sustained growth in premium income in 2022, we do not anticipate a significant reduction in actuarial valuation for life and annuity funds because the yield environment is expected to remain stable around current levels for the most part of the year”, Meristem said.
This, coupled with elevated claims expenses is expected to moderate underwriting profitability to N15.60 billion, according to analyst.
Further insight into the insurance company’s book shows that total investment income improved by 16.17% to NGN12.24 billion. The growth was fueled by a 13.87% jump in interest income on fixed income assets.
However, investment yield declined to 8.63% from 8.83% in 2020 amidst low-interest rate environment in the market.
Additionally, a huge fair value loss of N17.63 billion impacted the company’s performance as the rise in the general yield environment lowered the prices of financial assets.
The pressures, coupled with the 40.86% spike in management expenses dragged profitability down by 20.75% year on year to N10.05 billion. Consequently, the firm’s net margin declined to 11.73% below its 5-year average of 13.90%.
“Flowing from our expectation of the general yield environment as noted above, we do not anticipate a dramatic change in fair valuations of financial assets”.
Hence, Meristem analyst Banmeke projects a profit after tax growth of 9.41% year on year for Custodian Investment, premised on moderated improvement in investment income.
As at 2021, CUSTODIAN’s solvency margin stood at N56.63 billion, a 2.15x above the regulatory requirement, while its capital base remains solid at NGN40.97 billion.
Analysts said Custodian capital is also well above the proposed regulatory benchmark of NGN18 billion. This signals the strong risk underwriting capacity of the business, according to Meristem.
While earnings assets improved marginally by 2.72% due to slow growth in financial assets, earnings quality declined to 1.86x from 3.42x in 2020, Meristem said.
Overall, analyst said the firm’s liquidity remained robust with a short term asset to total asset ratio of 17.22% as against 14.78% in 2020.
CUSTODIAN Plc. Overwhelms Broadstreet as Profit Hits 5-Year High
