We added Munich Re to our equity list with a price target of €200. This is in line with our strategy of investing in companies that will benefit in a rising interest rate scenario.
We now hold a 4% exposure to Munich Re in our equity fund. The shares of the Company are up 3.35% year-to-date. However, they underperformed Alllianz (which has been on our equity list for a long time) by 10% over the same period.
The difference mainly being Allianz seeing an inflow in its PIMCO Funds as well as Munich Re adopting a very conservative strategy in a low-interest rate environment.
We believe that at current levels, Munich Re offers an attractive entry point for shareholders.
About the Company
Muenchener Rueckversicherungs-Gesellschaft AG (Munich Re) provides financial services. The Company offers reinsurance, insurance, and asset management services. Munich Re has subsidiaries in most major financial centers throughout the world.
Rationale for investing in Munich Re:
• The shares are trading on an attractive indicative gross dividend yield of 5% which is very attractive in today’s markets
• Munich Re has a current set-up of rising dividends and EUR1bn of buybacks per annum
• The shares are trading on a P/E of 10.37x, a discount to Allianz, which are trading on a P/E of 12.10x
• The shares are trading on a 2018E earning yield of 10% which is very attractive compared to other industries trading on high valuations
• The reason why this Company has underperformed so far this year is mainly due to the low-interest rate environment we are in presently. The business model of this company includes life insurance products. The Group will see an improvement in margins once we see a rising interest rate environment
• We are investing the banks such as Societe Generale and BNP Paribas because we believe the ECB will start raising rates sooner rather than later. Companies like Munich Re will also benefit in a rising interest rate environment
• One year after the start of the restructuring programme has been kicked-off, management sees itself on track for the 2020/21 target net profit
• Management stated its ambition to earn €2.3bn FY17 net profit, in the upper half of the €2.0-2.4bn target range
• Sales at Ergo are above the comparative period in 2016, and the strategy is fully on track
• Pricing at July renewals is we estimate down -0.5pct, in line with January and April renewals, and no worse
• An important note to also take into consideration – there were no material catastrophe claims this year which hit the P&L of insurance companies
• Price targets – latest price targets have been upgraded. However there are other analysts which still need to review their price target. If they increase it in line with the latest price targets, we should continue to see support in these shares
Conclusion
We are comfortable holding Munich Re in a well-diversified portfolio. It is well positioned to continue to benefit from further growth as global economic growth continues to remain supportive.
Munich Re has a strong set of financial statements and we expect the company to continue strengthening its position in years ahead in a rising interest rate environment which is our base case scenario.
Disclaimer: This article was issued by Kristian Camenzuli, Investment Manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article is being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice. Calamatta Cuschieri Investment Services Ltd has not verified and consequently neither warrants the accuracy nor the veracity of any information, views or opinions appearing on this website.