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Fair value price $887.22 for Guardian Holdings shares implies offer at $795.00 comes at discount of 10.40%

Wednesday, June 09, 2021

Editor's Note - The following is the Equity Research Report done by JN Fund M anagers Limited on Guardian Holdings.

THE Guardian Holdings Limited (GHL or the Company) is a Trinidadian company which is the parent company for an integrated financial services group known as Guardian Group. The group provides integrated diversified financial services focusing on life, health, property and casualty insurance, pensions and asset management.

The Guardian Group currently serves most countries across the English- and Dutch-speaking Caribbean including The Bahamas, the Cayman Islands, the US Virgin Islands and Belize. In 2019 NCB Financial Group (NCBFG) became the ultimate parent company of Guardian Holdings Limited (GHL) and now controls approximately 62 per cent of the shares outstanding. Currently, the shares of GHL are listed on both the Trinidad and Tobago as well as the Jamaica Stock Exchanges.

Analyst opinion

Guardian is one of the region's leading financial institutions with a long history of delivering strong revenue growth and profitability. The company operates in most of the countries in the Caribbean and is rated among the top five in the major markets in which it operates. Like most companies regionally, the Guardian Group was severely challenged in 2020. However, in 2020, the group delivered operational and financial results which were creditable along several metrics and especially when taken in the context of the pandemic. During the year Guardian delivered an overall net revenue growth of 4.0 per cent, despite suffering a double-digit decline in its investing activities, a result we believe underscores the strength of its insurance arm. Additionally, Guardian managed to keep its operating expenses well contained, resulting in the improvement of its overall efficiency. One of the knock-on effects of the improved efficiency and revenue growth is the company's commendable profit out-turn, which was 12.0 per cent above the amount posted in 2019. While we are very aware that the novel coronavirus pandemic is not over, it is very likely that the worst is behind us. With vaccination programmes being rolled out regionally and as respective governments continue to ease out of the pandemic, the companies within the region continue to gradually recover from the crisis.

This recovery is also evident for Guardian Group which posted revenues and profits in Q1 2021 which are significantly above its previous year's. The fair value of the shares being offered is estimated at $887.22 while the shares are being offered at price of $795.00, which implies a discount of 10.40 per cent. Based on the foregoing we rate the GHL's stock in this offer as BUY for investors with a medium- to long-term time horizon. However, as at the time of our analysis the stock closed at $759.851 on JSE and the equivalent of $770.041 on the TTSE. Therefore, investors with the appropriate access to these markets may consider purchasing the shares on the open market at those prices as the investor would enjoy an even greater discount to the fair price.

Invitation details

NCB Global Holdings Limited is inviting offers for the subscription of up to 2,000,000 of Guardian Holdings Limited (GHL) ordinary shares at a subscription price $795.00. Please see the summary for more details on the offer. After the sale, NCB Global Holdings Limited total shares will decline to 141,777,991 (61.10%) from the previously held 143,777,991 shares (61.97%).

Financial Analysis

GHL's consolidated net revenues are generated through its insurance and investing activities, as well as from fees and commissions through its brokerage activities. As with most companies regionally, the year 2020 proved challenging for the group as it posted net revenue growth at the slowest rate in over three years. However, despite the effects of the pandemic and a decline of 27.8 per cent in its investing activities, the group's net revenues advanced by 4.1 per cent to TT$2.55B in the year. The lion's share of the group's revenues is generated in Trinidad and Jamaica which, combined, account for 63.1 per cent of 2020's revenues. Trinidad, Guardian's home country, accounts for majority of its business and 46.4 per cent of revenues generated in the year. As countries reacted to secure their borders and slow the spread of the virus, particularly in the first half of 2020, business activities declined dramatically. However, as the society adjusted to the new normal and vaccines became commercially available towards the end of the year, the recovery which started towards the end of the second quarter accelerated in the final quarter of 2020 and continued into 2021. Unsurprisingly, as business activities improved, the group's revenues picked up and the company closed 2020 with a strong performance. Judging by the results posted for Q1 2021, the group's strong performance in the second half of 2020 seems to have carried forward into the new year, with Q1 2021 revenues reported at TT$577.2M, more than doubling the results posted in the similar period a year earlier.

Over the five years, the group, has taken several steps to improve its efficiencies as it seeks to transform into a world-class insurer. Consequently, significant amounts have been spent in the areas of technology and human resources, and these investments were instrumental in the group activating its digital strategy which served them well during the pandemic and which probably led to its operating expense ratio declining by approximately 9 percentage point to reach 54.0 per cent in 2020. In the year, the group continued to invest in technology and believes it has only started to scratch the surface of the opportunities it expects from these investments. Consequently, it may be reasonable to expect this ratio to decline over the medium term as technologies are deployed and accepted across the group's network. The expense ratio for the group in the first quarter of 2021 was also 54.0 per cent. The knock-on effect of record-breaking net revenues and operational improvement is that the group posted net profits in 2020 which were 12.0% above the amount posted a year earlier. In FY 2020 the group reported net profits of TT$774.45M (EPS: TT$3.34), up from the TT$692.31M (EPS: TT$2.98) posted in FY 2019. For the three months ended March 31, 2021, GHL reported record net profits of TT$176.79 M, which was better than the loss of TT$34.75M recorded in Q1 2020.

Valuation Analysis

GHL's Fair Value Estimate

To arrive at our fair value for GHL we used the price/earnings and the price/book valuation methods.

Price Earning (P/E) and Price Bookings Model (P/B)

To arrive at the fair price based on the P/E method, we calculated the price to earnings ratios for selected listed companies in the financial services industry. The industry average P/E was calculated as 11.43x while at an offer price of $795.00, Guardian's P/E was 8.5x. As Guardian's trailing 12-month earnings per share for the period ending March 31, 2021 was ~$93.451, its fair value based on the P/E method equated to $1,068.24. The average industry P/B ratio for the selected companies listed on JSE was calculated at 1.61x. The selected companies included the JMMB Group, NCB Financial Group, Scotia Group Jamaica, and Sagicor Group Jamaica. With a book value per share of $439.42 as at March 31, 2021 the fair price of Guardian's stock was calculated at $706.19. To arrive at the fair value for the company's stock we averaged the results of both the P/E and the P/B methods and arrived at $887.22. This fair value price of $887.22 implies that the shares in this offer at $795.00 are being offered at a discount of 10.40 per cent.