This is not investment advice and is general in nature. Do your own research before taking any positions in the securities listed below. You should carefully consider your financial situation and goals before making any investment decisions.
#1: Clearview ($CVW) is improving, but I'd rather pay-up for NobleOak ($NOL)
My thesis for $NOL/$CVW is simple; the Big Players (e.g. TAL, AIA, Zurich etc) do not see Australia as a good market for life insurance b/c the policy count has barely grown in >5yrs. As such, small players can steal a small amount of mkt share %. This thesis only works when the smaller players are affordable, shrewd underwriters & do not get squeezed by reinsurers
In the recent Feb’23 suite of results, Clearview ($CVW) presented a relatively clean set of results. My thoughts were
WM overhang is not complete: For the >$360m market cap, you are at least in part paying for the WM business which probably chips $0-$6m of NPAT off each year. In short, I do not like the WM part of $CVW
Potentially riskier underwriting: Clearview insures a wider purvey than Nobleoak (e.g. they cover a bigger amount of Trauma, TPD & Business Expense Cover) and also targets the indirect market (i.e. through superannuation). My preference is simple Life and Income Protection via a direct platform
Slower growth in Mkt Share: New Business market share moves around, however, the in-force share is a better metric. In short, $NOL has grown significantly:
$CVW in-force market share has grown 3.0% to 3.1% over the last 12 months
$NOL in-force market share has grown from 1.9% to 2.5% over last 12 months
Partners are helping growth: As shown below, $NOL has had a lot of help from strategic partners growing their business, more so than $CVW (e.g. LifeSolutions)
$CVW - Almost all of their growth is via partners/WM
$NOL - Blend of direct & partners
$CVW is cheaper: At a $360m Mkt cap, $CVW has an embedded value of $590m. Whilst this sounds like a bargain, there is a loss-making WM business and most peers trade at a c.15% discount to EV. Conversely, $NOL trades at a premium to EV (c.20%, albeit they have not disclosed latest #)
Overall: I do think $CVW should trade at a bigger discount to $NOL because it takes more underwriting risk and has a WM business. Whilst I think $NOL is risker than buying a broker (e.g. AUB/Steadfast) I think there is a greater long-term upside because $NOL is growing at a greater rate. Based on the above I will continue to hold $NOL despite it trading at a premium to EV. I would not intend on adding further a) the premium to EV unwinds b) they can post higher earnings from simply cutting advertising spend.
#2: I-REITs in the UK/Europe can teach us some interesting lessons:
Falling UK I-REITs may be tempting on big yields, however, the quality of the portfolio and the debt headroom has never been more important. Not all sheds are created equal
Note: Managed FUM growth is also a factor for the divergence in returns.
UK vs. EUR: As shown by $GMG's huge growth in Dev income from Europe, the difference, is there has been more stability in European Industrial cap rates than in the UK (e.g. Segro have done well in Poland as a secondary EU location)
Big Box (e.g. BBOX.L) probably won't beat Infill: Tritax ($BBOX.L), which specialises in big-box industrial has traded off significantly due the to fact:
UK rent growth was bigger in Big Box vs. Infill however generally it is assumed that the tougher planning & greater land-constrained nature of infill means their values are steadier than infill
UK Industrial traded off significantly in the last 6-9 months
Despite the big "expected" rent growth in the UK, capital vals were way better off in EUR vs. UK (partially due to debt and other factors)
Remembers which debt metrics count: Lender usually have a range of covenants, however, it is important to remember that:
In a falling tide, LVR hurts holders of secondary stock because values fall more
In a rising tide, Debt/EBITDA favours secondary stock
Generally, it is best to look at both covenant metrics than solely LVR.
Conclusion: Generally with trading REITs, I would consider the best strategy to avoid placing too much emphasis solely on one metric (e.g. LVR or discount to NAV). Now REITs are trading at a discount to NAV: there is a temptation to look where the steepest discount. However, the most compelling returns are likely to come from REITs with:
The underlying properties retain value in a sinking market
There is debt headroom (namely ICR) which may not be obvious from LVR
An ability to get development profit or rent reversion. It is important to note that Dev profit is not just YoC-related, it could be IRR related
I am not entirely convinced that $BBOX is that asset
#3 - TAH's cash conversion is an issue
Even though $TAH rallied on their 1H23 result, it is easy to forget their cash conversion was poor and this was after adjusting for a favourable de-merger impact
Reported OCF
Impact of TLC on 2021 figures
So in short - $TAH barely made any OCF in Dec'21 and negative in Dec'22, however, this includes c.$150m of one-offs:
Negative: $160m one-off settlement payment (QLD Govt. & Racing QLD)
Positive: $11m of “insurance recoveries”
So as you can see - the cash numbers are a bit of a mess. The way I see it, just take consensus estimates ($147m Net CF in 2024 or 15x CF)
Conclusion: TAH is at a structural cost disadvantage vs corporate bookmakers because of their old license agreements which have higher product fees and tax commissions. If you have any holding in $TAH you are essentially betting on a) better licensing with the states and b) wagering services growing vs others. I have made a small bet on $TAH - but if either of these two changes do not work out... I am withdrawing given the low cash conversion today.
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