09/2020

Investment idea: PZU S.A. – An attractive long-term investment?

27/09/2020

Business description

PZU S.A. is the No 1 insurer in Poland and the largest in the CEE region with foreign operations in the Ukraine and the Baltic countries. Apart from its insurance business, the state-controlled company is also active in the areas of asset management (Pekao TFI and PZU TFI together are No 1 in Poland), pension funds (PZU OFE is No 3 in Poland), banking (20% stake in the 2nd largest Polish bank Pekao S.A. and 31.9% stake in the 8th largest bank Alior) and private healthcare services (3th market position).  PZU has been listed on the Warsaw Stock Exchange since 2010 and currently has a market cap of PLN 21.1bn/EUR 4.7bn.

Results

While its H1/20 results were affected by COVID-19 and write-downs of its banking assets of PLN 1.3bn, net income excl. one-offs reached a record level of PLN 1.7bn (+31.1% y-o-y) and the Return-on-Equity 19.1%. Gross written insurance premiums slightly declined by 1.3% y-o-y to PLN 11.7bn. Foreign operations contributed c. 6.4% to the operating income, which excl. one-off equalled PLN 2.2bn (H1/19: PLN 1.7bn). In the area of Healthcare services, where PZU already operates 130 own medical facilities, 48 hospitals and c. 8,700 pharmacies in Poland, revenues (incl. health insurance products) reached PLN 439m (+20.6% y-o-y) and the EBITDA margin 12.5% (H1/19: 10.1%). In our view, the write-downs relating to banking assets were conducted in order to reflect (1) the reduction of interest rates by the Polish central bank in H1/20 to a record-low 0.1%, (2) potential negative consequences of the weaker economy due to the coronavirus pandemia on the loan portfolios, and (3) weak performance of shares of both Alior Bank (-58.6% YTD) and Pekao (-51.9% YTD) on the Warsaw Stock Exchange.

In 2017-2019, PZU has been growing on the top-line at a CAGR of 2.9% (in 2019, gross written insurance premiums equalled PLN 24.2bn) and the EBIT margin amounted to 23.9%-30.2%, thus was significantly higher than of e.g. Allianz SE (8.3%-8.8%).

Summary and Conclusion

PZU, which has the highest S&P credit rating (A-) of all Polish companies, is very strong in two areas that in Poland (and its foreign markets) are particularly promising in the long run:  (1) Insurance, as the penetration of insurance products to GDP per capita is still low in Poland or Ukraine compared to other European countries such as Switzerland or Denmark, and (2) Private health services, for which there is increasing demand as the quality of service at public health facilities in Poland and other PZU’ markets is not considered to be the best. In addition, the stock seems attractively valued when taking into account its average historical 3-year P/E and consensus P/E 2020E (11.6x vs. 8.9x). German Allianz is currently trading at a consensus P/E 2020E of 10.5x.

As PZU has historically paid very attractive DPS, we expect that the company will again become a dividend payer in 2021E (like all financial institutions, this year it was forced to scrap the dividend for 2019 by the Polish Financial Supervisory KNF due to the coronavirus pandemia).

The main risk, which we see, is the owner (the Polish state), whose decisions are not necessarily always in the interest of minority shareholders. However, the Polish state depends on the dividends from its shareholdings, which supports our view that PZU will return to its historical dividend policy as soon as possible.

Disclaimer: The author of this article owns shares of PZU