Admiral’s results for the first half of last week may not appear promising, but it may be on its way to smoother waters following a turbulent period. It could also build on an impressive run since April when we first covered this stock.
Investors may want to look closer at the non-life insurance company, even if the recent venture into life insurance, with Legal & General and Just Group that we reported on on Monday has not yet brought much reward. This is because Admiral, which is well capitalized, continues to grow its customer base and raises prices to compensate input cost inflation while offering a decent return, offers a good yield.
The interim results are not particularly impressive, with a decline in UK motor insurance clients, a dividend cut, and an increase in profits which lagged behind the growth in revenues. However, the company is still far from having a catastrophe, as it is known for its Admiral and Elephant brands, and for its car, travel, and pet insurance businesses.
The slight decline in UK auto insurance customers from 4,94 million to 4.76 millions at the end 2023 has made headlines. This is especially true as this operation can’t point to any growth in its customer base after the end 2020.
Admiral’s total customer base has risen from 7.66 to 9.41 millions since 2020. It also has nearly as many customers outside the UK motor industry – 4,65 million – as it does within UK car insurance.
The UK household motor and European operations are now showing a profit. This is in line with our thesis that we presented in the spring. We believe the FTSE 100 firm has built a solid foundation for a possible rise in profits in the long-term after the speed bump of 2022, when increased accidents, bad weather, and higher repair costs led to an increase in total net insurance claims, and a reduction in earnings.
In the first half 2023, the growth in net revenues and premiums written outpaced profits again, but pre-tax income rose, suggesting that Admiral has likely beaten the worst of cost inflation.
Analysts appear to agree, as they predict a modest rise in the group’s pre-tax profit in 2023 and an increase of double-digit percentage in 2024.
Admiral has enough capital, 182pc at the moment, to cover all its obligations even in an extreme shock.
Admiral has a healthy capital position, but the management is taking fewer risks, as shown by the board decision to reduce the interim dividend from 60p to 51p per share (and the lack of special dividends).
Analysts still expect a final payment of 60p in 2023 to bring the total up to 111p. This would yield a 4.6pc return.
These figures are in addition to ordinary and special dividends totaling £14.09 per share over the last decade.
Admiral can produce a valuable income that will supplement any capital appreciation.
This theory is a non-starter. The attempts we made last week to find comfort in the fact that Bellway shares were still holding up well after a disappointing full-year trading report have been undermined by Crest Nicholson’s profit warning on Monday, which has drilled a new hole in their own share price as well as those of its rival housebuilding companies.
Our profits from Crest Nicholson, since we covered the stock in 2020, are gone. However, the cumulative dividends of 30.6p per share and 5.5p to be paid on October 13 will make up for this paper loss.
The management is targeting a full-year dividend payment of 17p, which would be equivalent to a 10pc yield.
This suggests that the market has already priced in a reduction for the next financial year.
A price-to book ratio of 0.5 already factors in a lot bad news. This may (eventually), protect us from losses. Although we admit, a positive catalyst for a near-term increase in the share prices is more difficult to find.
We will have to be tough.