| HIGHLIGHTS
SFC Q1 2020
GHL Q1 2020
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SFC, GHL Hit by Market Declines
This week, we at Bourse evaluate the performance of two Non-Banking Finance stocks, Toronto Stock Exchange-listed Sagicor Financial Company Limited and locally listed Guardian Holdings Limited for the quarter ended 30th March, 2020. Economic contractions and financial market volatility stemming from the impact of COVID-19 pandemic ultimately contributed to a decline in performance of both entities.
Sagicor Financial Company Limited
For the three-month period ended 31st March, 2020 Sagicor Financial Company Limited recorded a Fully Diluted Loss Per Share of US$0.197, a 190.8% reduction from an Earnings Per Share of US$0.217 reported in the prior comparable period.
Net Premium Revenue fell 14.9% in the period, moving from US$365.1M to US$317.9M, impacted by lower new annuity business in the US. Total Revenue, meanwhile, stood at US$343.2M in Q1 2020, a 33.5% reduction from that reported in Q1 2019, with the company’s top line performance being negatively affected by economic headwinds and contractions in the financial markets. Total Benefits fell 41.6% from US$347.8M to $203.0M, a decline in funds paid out to clients. Meanwhile, Total Expenses for the period recorded a 16.8% increase to end the period at US$152.9M relative to US$130.9M recorded in the prior year. SFC recorded a Loss Before Tax of US$18.3M in Q1 2020, compared to Income before Tax of US$44.7M in the prior comparable period. Net (Loss)/Income for the Period posted a 176.4% decline shifting from a profit of US$32.9M in Q1 2019, to a loss of US$25.1M in Q1 2020. Net Income Attributable to Common Shareholders consequently posted a loss of US$29.3M, a 287.8% reduction from a profit of US$15.6M in Q1 2019.
Outlook
Sagicor Jamaica has historically been the Group’s largest operating segment on a Profit Before Tax (PBT) basis, contributing US$22M to Total Income Before Taxes, in the quarter ended 30th March, 2020. Premium Income recorded by this segment in Q1 2020 rose US$14.6M YoY, the consolidation of a 60% shareholding in Advantage General Insurance Company Limited contributed a reported US$6.1 in net premium. Interest Income rose 5% to US$40.7M. However, as financial markets contracted amid the uncertain economic fallout of the COVID-19 virus, Sagicor Jamaica reported significant increases to Investment and Credit Impairment Losses. Ultimately, leading to a 19% YoY decline in Revenue. This combined with increased expenditure contributed to a 37% YoY decline in Income before Taxes.
Sagicor Life recorded a 71% decline in Income Before Taxes, attributable to a comparative fall in Revenue. For the Period the segment reported both a fall in Premium Revenue from Insurance operations and an increase in Investment and Credit Impairment Losses. Sagicor Life USA recorded adverse impacts from the economic implications of the COVID-19 pandemic. Its annuity product business line face significant headwinds amid the Federal Reserve’s decision to cut benchmark interest rates. With t financial markets contracting and economic spending falling, Sagicor Life USA recorded a 56% YoY decline to Total Revenue moving from US$208.4M to US$90.7M. In Q1 2020 Benefits and Expenses fell 45% YoY, however this decline in expenditure did little to offset the significant fall in top line performance. Resultantly, Sagicor Life USA reported a Loss Before Taxes of US$18.1M for the period.
Acquisition Activity
Sagicor Financial Company Limited has in recent times been on a drive to expand its insurance portfolio through merger and acquisition activities. With a capital base of US$400M in cash, SFC is well positioned to continue any goals of inorganic regional growth.
In October, 2019 Sagicor Life announced its intention to acquire the traditional insurance portfolios of Colonial Life Insurance Company (Trinidad) Limited (CLICO) and British American Insurance Company Trinidad Limited (BAT). The completion of these acquisitions are estimated to contribute US$1.2B of total investment assets to Sagicor’s balance sheet, a similar amount of actuarial liabilities is also expected to be assumed. In November 2018, SFC stated its intention to acquire Scotia Jamaica Life Insurance Company Limited and Scotiabank Insurance Trinidad and Tobago (ScotiaLife T&T Limited). However, in late 2019 SFC and the Bank of Nova Scotia Jamaica Limited mutually agreed to not proceed with the transaction, while the agreement to acquire the ScotiaLife T&T Limited valued at US$96M, remains ongoing. The agreement to acquire the operations of ScotiaLife T&T expires on the 30th June and with adverse economic conditions persisting across all geographic segments of SFC’s operations, the Group has stated that there can be no assurance that the transaction will be completed.
SFC pursues share buyback
SFC has expressed its intention to pursue a share buyback program aimed at the repurchase of up to 3,000,000 shares or 2.01% of the Group’s 149,161,886 issued and outstanding common shares. This move is designed to bolster liquidity for the stock and likely enhance opportunities for capital appreciation.
Share Repurchases made by the Group are expected to be executed at the prevailing market price at the time of purchase and repurchases are scheduled to commence on the 22nd of June and end on June 21st, 2021. SFC is bound by regulations governing the Toronto Stock Exchange, until June 30th the Group cannot purchase more than 2,489 common shares in a given day, following which a maximum of 1,244 shares may be acquired over the course of each trading day, with the exception of block purchases.
Bond Holder Considerations
At Sagicor’s most recent Investor presentation, management noted that it was evaluating the refinancing of the Group’s outstanding US$320M 8.875% bond due August 2022. With the sharp fall in the current interest rate environment coupled with Sagicor’s credit positive rating by CariCris at AA and rating upgrade by S&P at ‘BB’, the company should have an opportunity to issue new debt at a lower cost of funding than the current 8.875% coupon. Refinancing can assist the company to lower their interest burden and extend their debt maturity profile.
Sagicor must give bond holders 30 days’ notice if they opt to call the bond, which currently offers investors a premium at $104.438 to Sagicor’s currently traded bid price of $101.50. The call provision ratchets down in pricing and adjusts to $102.219 on August 11, 2020, providing management with a lower cost opportunity to exercise the call feature.
The Bourse View
SFC’s is currently priced at CAD$5.35 and trades at a trailing price-to-earnings ratio of 7.0 times, below the average of its industry peers of 9.6 times. The stock offers investors a trailing dividend yield of 5.8%, consistent with the average of its industry peers of 5.9%.
With a broad-based recovery in financial markets over the second quarter of 2020, there is an increased likelihood of a reversal of mark-to-market losses for SFC. This increases the prospect of an improved Q2 2020 result for the company.
On the basis of fair valuations and the potential for growth from future acquisition activity (especially with excess capital available), but tempered economic impact of COVID-19 on its operations, Bourse maintains a NEUTRAL rating on SFC.
Guardian Holdings Limited (GHL)
GHL recorded a loss per share of $0.16 in Q1 2020, relative to an EPS of $0.46 reported previous comparable period.
GHL benefited from a 17.3% uptick in Net Results from Insurance Activities, which for the period stood at $180.8M compared to $154.1M. Net Income from Investing Activities, which contributed 62% of Net Income in Q1 2019, contracted 91.1% in Q1 2020, amounting to $26.8M relative to $301.8M in Q1 2019. Fee and Commissions Income from Brokerage Activities, recorded an increase moving to $39.8M from $30.4M, a 30.7% upswing. Net Income from all activities, experienced a 49.2% YoY decline amounting to $247.3M, with improvements in Income generated by Insurance Activities and Brokerage Activities being unable to offset the sharp decline in Income from Investing Activities.
Operating Expenses increased 3.3% to $309.1M, while Finance Charges stood at $36.7M, 2.0% more than that incurred in Q1 2019. The Group reported an Operating Loss for the period of $85.9M compared to an Operating Profit of $156.6M recorded in Q1 2019. Profit Before Taxation for the period fell 149.7%, as a loss of $81.1M was recorded relative to a PBT of $163.1M in the prior year. A tax write back of $40.2M, brought the Loss for the Period down to $34.7M, 130.6% less than a Net Profit of $113.5M recorded in Q1 2019. Loss attributable to equity holders of the parent stood at $36.5M, 132.3% less than a Profit of $112.9M recorded in the prior year.
Net Income Falls
Net Income from Investing Activities stood as the primary revenue driver in Q1 2019, in Q1 2020 however this dynamic has been altered amid declines across financial markets. In Q1 2020, GHL’s investment portfolios have generated income of $26.7M, 91.1% lower than $301.8M which was reported in the previous period. The uptick in the US and Jamaica stocks markets which bolstered GHL’s performance in 2019 was not replicated in Q1 2020 as financial markets encountered significant headwinds due to the COVID-19 pandemic.
Net Income from Insurance Activities have historically been the second major contributor to Net Income. In Q1 2020, however, declining Investment Income and a 17.7% YoY growth in Income generated from Insurance Activities has led to a shift in revenue composition. Insurance Activities accounted for 73.1% of Net Income in Q1 2020. Net Income from Brokerage Activities, the smallest driver of Net Income in normal conditions, became the second largest contributor to Net Income in Q1 2020, recording a 30.7% YoY increase.
Financial markets have experienced significant recovery since experiencing steep drop-offs in valuations in Q1 2020. Consequently, GHL could benefit from a sharp rebound in Investment Income over the second quarter. However, a resurgence of global COVID-19 cases, coupled with unpredictable and unprecedented monetary and fiscal authority intervention is likely to make volatility across financial markets a theme for the rest of 2020.
The Bourse View
GHL is currently priced at $18.90 and trades at a trailing price to earnings ratio of 8.1 times, below the Non-Banking sector’s average of 15.6 times. The stock also offers investors a trailing dividend yield of 4.0%, above the sector’s average of 2.3%. On the basis of relatively attractive valuations, but tempered by heightened volatility in financial markets as well as adverse economic conditions in GHL’s operating jurisdictions, Bourse maintains a NEUTRAL rating on GHL.
For more information on these and other investment themes, please contact Bourse Securities Limited, at 226-8773 or email us at invest@boursefinancial.com.
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