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GRUPO CATALANA OCCIDENTE: 1Q’20 RESULTS AND CHANGE OF T.P. TO UNDER REVISION (ANÁLISIS BANCO SABADELL)

1Q'20 vs. 1Q'19 Results:
Premiums: € 1.149 Bn (+4.9% vs. +3.5% BS(e));
Technical Result: € 116.6 M (+2.1% vs. -1.4% BS(e));
EBT: € 127.8 M (-12.5% vs. -15.1% BS(e));
Net Profit: € 90.2 M (-8.2% vs. -9.0% BS(e));

The company has released 1Q’20 results with no surprises, slightly beating our estimates in all the main business lines. This means premiums remain strong and the combined ratio (CR) in the Traditional business has performed very well. As expected, the sour note comes from the Credit Insurance business. Billed premiums grew +3.2% vs. 1Q’19 (vs. +4% BS(e) and near +7% seen in 2019), whereas CR rose to 83.1% (vs. 82.8% BS(e) and vs. average lows of ~74.5% seen throughout 2019) due to Covid-19.
Thus, the Recurring Result in Credit Insurance reached € 48.3 M (-23.1% vs. 1Q’19), fully in line with our estimates and vs. double-digit growth in 2019. The best reading would come from the very strong reduction to the Reinsurance result. Thus, assuming -6% in total revenues terms in 2018 and around -4% in 2019, in 1Q’20 BS(e) this would mean only -1.5% thanks to the heavy pressure GCO would be putting on prices (this will have to be clarified in the conference call on 4 May at 16:00 CET). Furthermore, the company will have to confirm the potential Govt. aid it would be negotiating with different governments (among them the German and Spanish governments with the CCS) in order to mitigate the sudden rise in claims being seen in this business. Therefore, although it could continue to rise over the coming quarters, and even exceed the 100% reference point, we think GCO will be able to bring it back to around 80-85% in a relatively short timeframe.
In the Traditional business, acquired premiums grew +4.9% vs. 1Q’19 and vs. +3.2% BS(e), speeding up the trends seen in the main businesses (multi-risk, motor and miscellaneous), and where for the time being there has not been a price war. Note that in Life insurance Antares’ premiums are already accounted as such. Added to this would be solid CR performance (to 89.2%), even somewhat better than our estimate of 89.39% and vs. 89.54% in 1Q’19. The best reading would come from Motor and Miscellaneous (the lower activity level on the quarter has translated into a reduction in claims), which offset the rise in Multi-risk (spike in claims from tropical storm Gloria). Thus, the Recurring Result in the Traditional business reached € 55.4 M (around +8% vs. 1Q’19), slightly worse than the +10.4% seen in 1Q’19 BS(e) due mainly to a slightly worse non-technical result and a slightly higher tax rate.
We place our T.P. Under Revision. In our Covid-19 scenario of V-shaped recovery (two quarters of deep recession followed by moderate recovery in the third quarter, strong recovery in the fourth and very strong recovery in the next year, with momentum that will could even extend to the second year), we see losses in 2020 (vs. +10% growth previously) and Net Profit/EPS’21 that would fall -45%, due almost fully to the Credit Insurance business, lowering our T.P. to around € 25/sh. This would still leave around +40% upside, and we reiterate our BUY recommendation. In our negative scenario of moderate U-shaped recovery (two quarters of deep recession followed by modest growth in 3Q and 4Q and strong recovery the next year and the second one; recovery in 18-24 months), we would cut our estimates by another -10%, bringing our T.P. to €~23/sh. (still with +25% upside). We should point out that in neither of the two cases are we considering the potential Govt. aid that could be announced by the company, and thus the scenarios would be floor levels in both cases. From market highs on 19 Feb, when the Covid-19 impact began to be priced in, GCO has fallen -40%, -10% vs. IBEX and -15% vs. the sector. BUY. T.P. Under Revision.