Shares in FTSE 100 insurance firm Admiral Group (LSE: ADM) rose again this morning following the release of an admirable set of half-year numbers, thus continuing a rich run of form that’s seen the value of the Cardiff-based business almost double in value in just one year.
While things certainly look peachy, I’m not sure I’d build a position now. Here’s why.
Frothy valuation
With CEO David Stevens talking of “substantial growth across almost all our businesses”, you know the numbers are going to be pretty good. And it proved to be the case.
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At £1.66bn, turnover was up 14% in the first six months of the year compared to over the same period in 2017. The total number of customers on the company’s books grew by the same percentage, to 6.23m, by the end of June.
Separated out, UK customer numbers rose 17% to a little over 5m. With over 4m cars now covered, Admiral reported an 11% rise in motor profits to £249.5m. The only fly in the ointment was a £1.9m loss at the company’s Household arm due to “weather events“.
Admiral’s International Insurance businesses also performed decently with customer numbers up 17% to 1.12m. A loss of £600,000 may still disappoint some but this was far better than the £10.1m recorded the year before.
This performance, when combined with the continued success (although relatively small contribution) of Admiral’s price comparison business, led the company to report a 9% rise in group share of pre-tax profits to £211.7m.
Income investors will also be happy. Having announced a 7% increase to the interim dividend (to 60p per share, which includes a special payout of 19.2p), it seems likely the company will yield the massive 5.7% expected by analysts in 2018.
So, what’s my issue with Admiral? In a word, ‘valuation’. At 16 times forecast earnings before today, the stock already looked pricey compared to peers.
Admittedly, this premium can be justified. The company’s return on equity and operating margins are consistently high, even if the former slipped slightly over H1. What’s more, its finances look in good order, with a net cash position of £103m at the end of 2017.
Nevertheless, I don’t think investors should get carried away. While further growth (and share price gains) are possible, the competition Admiral faces, coupled with the potential impact of a ‘no deal’ Brexit, make me more inclined to shop around for value in the sector. Speaking of which…
Better value
With its share price almost 20% lower than at this time last year, things haven’t been so great for holders of stock in £1.7bn cap Hastings Group (LSE: HSTG). This does, however, leave the company’s stock on a far more compelling valuation of a little less than 12 times earnings.
There are also indications that its fortunes may be turning. Last week’s interim results revealed a 9% rise in net revenue and stonking 22% increase in adjusted operating profit. Encouragingly, management also appeared confident in the company’s ability to meet expectations for the full year.
In addition to the recent improvement in trading, Hastings is also likely to yield of 5.2% in 2018, rising to 6.5% in 2019. Although these payouts aren’t massively different to those offered by Admiral, the extent to which they are covered by profits appears better, at 1.7 and 1.5 times respectively.
So, while I still rate both companies, Hastings gets my nod at the current time.
