For a company that is paying dividends, has a decent record of positive earnings, First Mutual Holdings is currently trading below stated book value.
A brief overview of its 2018 financials shows some good numbers — for the year to December 31, 2018, the insurance giant’s consolidated gross premium written (GPW) rose 45 percent to US$180,6 million on the back of the consolidation of NicozDiamond.
And at US$11 million, operating profit was 37 percent above prior year, while profit for the year rose 45 percent to US$17,6 million. The group declared a dividend of RTGS$0,29 cents a share.
Notwithstanding the positive financial performance, at face value (that is, its share price on the Zimbabwe Stock Exchange) the company does not appear as an attractive prospect due to its understated value.
As of yesterday, FMH’s stock on the local bourse is priced at a ‘lowly’ $0,2400 cents, which is also its highest point this year, having earlier hit a low of $0,1030 cents.
Chief executive Douglas Hoto, agrees that the share price is on the low side, but maintains that it’s not a reflection of the performance of the company.
“We believe that the share price is understated. If you look at historic price earnings ratios, you will see that the price earnings are amongst the lowest on the stock market.
“We don’t believe that we should manipulate the share price but we are now paying dividends consistently and we expect the share price to go up. There, maybe, need of some work on our part in terms of educating the market about our sources of profits and whether they are retainable,” said Hoto.
“I once said the essence of the business is ensuring that it demonstrates retainable earnings around operating profits. I think our business is not easy to understand. I think we need to educate the market about the behaviour of our shares. If you do a rough calculation by comparing the earnings and the dividends with other similar companies, that share price must be up three times what it is today.”
FMH is a diverse financial services holding company with interests in life and short-term insurance as well as real estate.
In terms of its linchpin business – insurance — Zimbabwe’s insurance penetration continues to be low, which means there is significant scope for multi-year growth. And that could potentially push the company’s share price going forward.
It is, however, not uncommon for financially-sound insurance firms to trade below stated book value.
A case in point is Aegon N.V, a New York Stock Exchange-listed multinational life insurance, pensions and asset management company headquartered in Netherlands.
Last December Forbes highlighted the company’s ‘cheap’ stock:
“Aegon N.V. is Netherlands-based and trades on the New York Stock Exchange. The price/earnings ratio these days is 4.8, much, much lower than the S&P 500 average p/e of about 16. You can buy shares now for an extraordinary 63 percent discount to its stated book value. Aegon has a good record of earning money: this year is excellent and the past 5-years is very good.”