PZU (PZU PW, PLN44.44, Sell, FV PLN36.50): 190118_PZU_Insurance business under pressure
We initiate on PZU with a SELL; our FV of PLN 36.5 suggests 18% downside. We expect price pressure in the motor insurance segment, where PZU has joined competitors in lowering tariffs in some market segments in 3Q18 which should be visible in the non-life operating profit in 2Q19-3Q19. The bottom line should be driven by the banking sector, but we think it will be difficult to offset the insurance business decline coming not only from a slowdown in GWP growth but also higher claims in 2019E, as it will be difficult to repeat the buoyant conditions seen in 2018. Our GWP forecast is 2% below consensus in 2019E and 2020E at PLN 23.54bn and PLN 24.02bn. Our 2018E net profit is broadly in line with consensus at PLN3,213m (+11% YoY), but below by 9% for 2019E-20E at PLN 3,024m (-6% YoY) and PLN 3,170m (+5% YoY), respectively. PZU trades at a 2019E P/E of 12.7x, a premium of 23% to international peers (on 10.3x). The stock is trading at a 20% premium to its 5Y average forward P/E of 10.5x, while Bank Pekao and Alior Bank are trading at 8% and 40% discounts.Powszechny Zaklad Ubezpieczen is an insurance group based in Poland. Co. is engaged in offering a broad range of insurance and financial products. Co. pursues three main lines of business: Property and Casualty Insurance, offered by PZU; Life Insurance, offered by PZU Zycie; and Open-end Pension Funds, offered by PTE PZU, the manager of OFE PZU Zlota Jesien. Co. maintains a network of sales and service outlets including 500 outlets throughout Poland, including 243 shared outlets (common for PZU and PZU Zycie), 137 outlets of PZU Zycie and 120 outlets of PZU. Co.'s business is focused on the Polish market but it also conducts insurance business in the Lithuanian and Ukrainian markets.
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