Recovery Prospects at RSA?

RSA shares look good value on the basis of recovery or as an alternative fate, playing its own part in the consolidation of the mature UK insurance industry. I believe that RSA Group shares at this point – share price 449p last seen – merit a place in a store of value portfolio. It’s my judgment that either this share’s earnings and dividends will recover as planned under its new management brought in for that purpose or, being large enough, it is likely to be cemented into another insurer by way of acquisition in a competitive industry where consolidation has obvious attractions. Personally, I back recovery prospects but they could be priced into a merger as a practical alternative.

To judge by the company names chosen for insurance companies over the years, their directors and seem to have a general, marked clinical – but reassuring – lack of creativity and invention. In the case of the RSA Group, the general insurance business, it is particularly obvious because those who direct its affairs have changed the name of that company from the arresting and picturesque to an image-free, three letter abbreviation. (Thank heavens they did not choose a four letter word abbreviation.) The old name, Royal & Sun Alliance Insurance Company, sounded like something started by King Louis XIV of France, the Sun King. Maybe they sold the names Royal and Sun when they flogged off the life business to Resolution?

RSA Insurance Group plc is an international general insurer. The company’s product lines include personal motor, household, personal other, commercial property, commercial motor, liability and marine and other. It serves small and medium sized commercial, large commercial, mid-market, other and personal customers. The company’s core businesses are located in the United Kingdom, Ireland, Canada, Scandinavia and Latin America. Its non-core businesses include Noraxis, Russia, India, the United Kingdom legacy and Middle East. Its commercial insurance products cover a range of business sectors from property, marine and motor through to utilities, telecoms, renewable energy, and construction and engineering. The company runs education and employability programmes, including skills-sharing volunteering activities, internships and small and medium enterprise (SME) business mentoring.

In 2011, the RSA Group share price stood at around 630p. About three years later it had tobogganed down halting just above 400p. That proved to be a low; from there the share price recovered before falling again, to 391p early this month. At 449p – the price last seen – the shares are not only staging another rise but also breaking out of that last six-month downtrend. Is that an omen? Certainly, these shares have plenty of scope for recovery. Over a five year period, they have underperformed the FTSE 100 Index 50% by falling 24%, whilst the FTSE100 Index rose 28% over that time.

The company’s accounts show that RSA has had a difficult time of late, which contrasts with net income of £448 million in 2012. The net profit last year represented an operating margin of a mere 0.74%. The management were able to raise cash from financing to the tune of £672 million which helped to keep the level of investing at a high level. Turning the company around is a new and experienced Chairman, a new and experienced CEO (Stephen Hester of RBS fame) and a new CFO.

In identifying fundamental investment value for RSA shares, I note that its balance sheet equity (the net assets attributable to ordinary shareholders) last December 31st, was reported as being worth an estimated 381p. That equity commands total assets worth a reported £22 billion or over five times the market capitalization of RSA equity. In other words, owners of the shares command a lot of business activity and as always, that has to be a consideration in terms of a company’s prospects as takeover, should they apply. In addition, the equity commands estimated sales revenue forecast for this year – the market consensus figure – of just under £7 billion. That means the shares are selling some two thirds such estimated forecast revenue. In crude terms, an investor is also getting a lot of sales revenue for the current share price.

Turning to market consensus estimates, I note that for last year they show an estimated loss of 14.4p a share with the annual dividend per shared slashed from 10p the year before (and 32.4p a share the year before that) to 2p. That puts the shares at 442p on an historic dividend yield of 0.45%. The market consensus estimates a transformation of affairs this year, with estimated, forecast earnings of 29p and a dividend payment of 10.5p or thereabouts. That puts the shares at 442p on an estimated prospective PER and dividend yield for this year of 15.2 times and 2.3%. For next year those consensus estimates are a forecast PER of 14.2 times and a dividend yield of 3.3%.

In essence, there are realizable prospects of a recovery in RSA earnings. There is economic growth and car production figures look good in the UK. Similar companies make much higher operating margins. Some might argue that RSA offers enough in terms of equity assets, enterprise value and sales revenue, to tempt a corporate acquisition interest at this share price if recovery prospects were to falter. In my opinion a share to tuck away in a portfolio looking for future capital growth whilst receiving a useful estimated stream of dividend income.