esure Group (ESUR.L): The
share price tells you that the market didn’t like today’s interims, to 30th
June 2015. The premiums written may have gone up 5.8% to £275.5m, but a
deteriorating claims experience resulted in a worse than expected combined
operating ratio of 95.8%. A year ago the COR was 90.9%, with most of the hit
being blamed on prior year accident reserves coming down from 19.0% to 14.9%. Gocompare
was brought into full ownership during the period, but a 25.2% profit increase
was down to cost control, with revenue only up a tickle at £59.6m against
£59.1m. As part of their ambition for Gocompare to double EBITDA over five
years, they seem happy with the return of Gio Compario to their ad campaign. I
can only hope that Sue Barker is still feeling vengeful. Anyway, this all dropped
through to a pre-tax profit figure of £46.5m, down 21.3% and underlying eps of
9.0p, down 20.4%. As the dividend payout ratio is stated as being 70% of
underlying eps then the interim should be 6.3p. Not so, with the interim
dividend cut by 17.6% from 5.1p to 4.2p, split between a 3.0p (FY2014: 3.6p)
normal and a 1.2p (FY2014: 1.5p) special dividend. Perhaps my confusion is that
they also aim for a one third, two thirds split between interim and final?
The industry is seeing rate increases for car policies, with esure
stating that they are getting better than industry average rises through. This
is a process that they will persist with, against a backdrop of continuing
claims deterioration. For the full year they are guiding to a COR of 96-97% (assuming
normal weather), so absolutely no improvement on the first half is envisaged.
Indeed they comment that their small-ish home insurance book has benefited from
benign weather so far this year and what goes around does tend to come around. It
still bothers me that there is £51m of additional (and profitable) service
revenue in these numbers, including £14.3m for the honour of you paying monthly
premiums and £10.4m for pushing the send button on your policy document e-mail.
The politicians are circling these issues and one day may sort the mess out.
Anyway, extrapolating the 20% fall in profits, points to full year eps
of around 15.5p. Using the 70% payout ratio, including the interim special
dividend, leads to an annual dividend of 10.9p. Mind you their one third two
thirds split between interim and final (note 6 in the release) points to a
total dividend of 12.6p (4.2p *3), which doesn’t look right. Stripping out the
special from the ‘thirds’ calculation points to a total of (3.0 +1.5 +6 =
10.5p), which looks plausible. The shares have done well this year, but on the
sharply lower share price today of 240p that is a PE of 16x and a yield of 4.5%
(using 10.9p). After taking the cold towel away, that yield is still a
temptation, but with a tough second half ahead and no progressive dividend policy,
there is no rush to invest in this stock. (Neil Cumming, 10th
August 2015)
These comments are not a personal
recommendation to deal. Any investments can fall as well as rise in value, so
you could get back less than you invest. I may have a financial interest in
some of the stocks written about. www.dividendpower.co.uk or e-mail at info@dividendpower.co.uk Twitter: @DividendPower
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