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Vicious circles?

24 September 2004 Angelo Coppola

Analysis: One of the features of undervalued sectors or stocks is that they often catch investor's attention through corporate action.

Adrian Clayton, from PSG Fund Managers reports that this is often triggered by the selling off of part of a business at a huge premium to the value that was attached to that part of the business by the market or via a take-over at a premium.

I have written on the attractiveness of insurance stocks from a valuation perspective before.

Although the insurance industry is particularly tough and stocks have a knack of disappointing in terms of premium income growth just when one believes that things are turning around, this does not dilute the inherent value which lies beneath the noise.

Whilst times remain tough, all the stocks in the sector are certainly not as cheap as they have been in the past. In the last two years, many stocks have been re-rated above their NAV's.

From an embedded value perspective however, only one of the big seven trade above embedded value, that being Discovery and none of the companies' trade too near to their appraisal values.

With respect to take-over and corporate action, the alleged sale by Sanlam of its stake in Absa might trigger the attention which Sanlam deserves.

Naturally, with this rumour hardening, the market has focused on Absa and re-rated the counter.

Should the sale be realised however, it is likely that the market will begin to revaluate the holdings of SA insurers, which are in many instances, simply large investment trusts.

The other point to note is that the market's earnings expectations lately (except for African Life) have begun to be met by insurance companies and in some instances actually exceeded (such as the operational performance of MetLife).

This is in my opinion a sea change and should be closely monitored by investors. As we all know, undervalued sectors which surprise on the upside have a nasty habit of running away from one.

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