EUR 200.00 For Business Accounts Only

GRUPO CATALANA OCCIDENTE: MEETING WITH THE COMPANY (ANÁLISIS BANCO SABADELL)

Highlights from the main messages conveyed at the meeting held today with the company’s CFO, Carlos González, and Head of Investor Relations, Nawal Rim:
 Traditional business:
- The positive performance in combined ratios (CR) is expected to continue at least in the 1H’21 given the low dynamism in the recovery of business frequency. Additionally, its cautious risk management (that opens the door to reserves recovery) and its decision of not taking part in the price war lead the company to keep the CR in this business at structural levels of 90% (around 2x the average recurring technical margin for its peers). Furthermore, the customer knowledge through its network allows it to prevent or at least to rule out non-profitable clients.
- AS for LDA and its business plan to capture customers, we believe the company considers that cutting prices consistently to gain market share is not sustainable in the medium-term (and GCO does not take part in price wars), and thus, LDA’s price discount (in motor, home and health) vs. sector is expected to ease gradually (currently -11.5% in motor and around -19.5% in home insurance).
 Credit business. The company is totally confident in its defence arms in the crisis (KPIs):
- The extension of state reinsurance (with a coverage of around 70% of its premiums in Credit Insurance) through June’21. Furthermore, the renewal carried out in December’20 has been conducted at more advantageous conditions than those initially signed.
- Reduction of its risk exposure (TPE) by around -10% on average in the riskiest sectors.
- Tariff increase of between ~+6% and +8% on average in 2020. This price trend will continue over 2021. Moreover, as a result of the portfolio cleanup, we would expect some traction on the turnover level. The company has not made any comments on the CR’21 gross (85% BS(e)), although, from 2022 on, we would expect it to return to its structural net reference from the 2015-19 period (~75%). A run-off of reserves cannot be ruled out at all either (as claims are not materialising and the portfolio has a much more defensive profile). If this is the case, the reference of a structural CR of 75% (vs. 80% assumed in our valuation until now out of prudence) would mean increasing our T.P. from € 35.50/sh. to €~40.00/sh. (around +13% vs. currently), which we cannot rule out.
- There is every indication that Govts. are doing everything they can to back economic growth and therefore, should the need arise, they would offer new extensions to the different state-backed reinsurance programmes. If this were not the case, the Company has stated that it does not expect a complicated situation for the Credit business, given that it has already done its homework over this period (reducing the risks weighing on the portfolios and setting tariffs in tune with risks stemming from higher prices).
 Organic growth and M&A. The company is still studying transactions that are complementary to its business (where synergies can be created, such as in Plus Ultra) or very profitable (such as Funerals, with a CR of ~75%). It has denied any interest in LDA. As for organic growth, it claims that there is still leeway for growth in the Health business (with a CR of ~80%).
 Dividend. We would expect remuneration in euros/sh. to increase in tune with the expected improvement in Net Profit. In this regard we recall that the average growth rate in Net Profit is between +8% and +10% annually (excl. Covid-19).
MARKET IMPACT
The company has conveyed a positive message on underlying trends. That is, a stable CR of 90% in Traditional business and a CR of ~75% in Credit insurance. Assuming the latter in our valuation would mean increasing our T.P. Moreover, we recall the company’s great capacity to generate resources through acquisitions with ROI>CoE and in cash, which has an accretive impact on shareholders. We reiterate our BUY recommendation. Since March’20 lows, when the pandemic broke out, the company has seen its share price double, outperforming the Ibex by around 90% and the insurance sector by +50%.