Sava Re: Seeking growth through M&A and abroad (BUY - initiation of coverage)

We initiate coverage of Sava Re with a BUY rating and a price target (PT) of EUR 18.0/share. The stock is trading currently at a c.23% discount on our 2020E P/BV, close to its average historical levels, and below its -1 standard deviation. Sava Re is a Slovenia-based insurance company, with its operations spreading across the Slovenian periphery in the Balkans, while its reinsurance arm underwrites businesses globally. As the insurer’s organic growth prospects are muted, especially in the highly penetrated Slovenian market, which is otherwise very profitable, and its international operations are too small currently to make a large difference to the bottom line, the company is set to diversify through M&A. To retain enough capital and be more flexible with acquisitions, Sava Re caps its dividend payouts at 45% currently. The dividends could still serve as a short-term trigger, however, as the company targets 10% DPS annual growth. The low interest rate environment, which is likely to be around for longer, at least based on the latest financial markets developments, is likely to continue to weigh on the investment income, and we forecast further declines in yields. The low liquidity of Sava Re’s shares weigh on their price as well, in our view.