EUR 900.00 For Business Accounts Only

PZU BUY - Permanent improvement in key business lines - IPOPEMA

Permanent improvement in key business lines
We resume coverage of PZU with a BUY recommendation and a target price of
PLN 55.4, which implies an attractive 21% upside potential. We believe the long-term
prospects for PZU’s core activity are solid, both in the life and non-life business. PZU
also looks relatively better than Polish banks for the short term, both in terms of
newsflow (banks could come under further pressure from the Presidential FX bill) and
valuations.
Car insurance stops burning cash
After being unprofitable in previous years, the car insurance segment returned to
profitability in 1Q17 thanks to regulations and increase in PZU’s market share to 40%
from 35% as of end of 2014. We expect this to continue in 2Q17 and become a
permanent feature. Although the upside potential in the mass segment is already
limited, there is still some room for improvement in the corporate division, which is
close to reach break-even point.
Life business should return to normalized profitability
PZU reported solid figures in 1Q17 despite a decline in profitability in the life
insurance segment, which depleted the insurance result by some PLN 200m in the
period. This decline occurs every two years on average due to higher mortality and
we expect life insurance to return to its normal profitability as early as 2Q17, which
will gear core earnings momentum.
Defensive investment portfolio
PZU has a rather defensive investment portfolio with the majority of investments in
government bonds. This makes it rather stable, with some volatility due to changes in
equity portfolios. Given the positive outlook for Polish equities in the mid-term, we
expect PZU’s own investment income to reach PLN 2.1bn in 2017, or only PLN 1.6bn
based on a conservative assumption of around a 3% yield, but with some upside
potential if interest rates go up.
Still reasonable valuation despite recent rally
PZU trades at P/E ratios of 14.7x for 2017E and 11.7x for 2018E. P/BV 2017E is 2.7x
for 19.6% ROE, while P/BV 2018E is 2.5x for 22.1% ROE. Our net profit estimates
are -2% and 10% versus the market consensus for 2017E and 2018E respectively.
Despite PZU’s disappointing DPS recommendation for 2017 (related to the
acquisition of Pekao) we expect the company to return to higher payments next year.
We forecast DPS of PLN 2.18 in 2018 (7% above the market consensus) and
PLN 2.73 in 2019 (8% above the market consensus).