Investment Analysis – Novae Group

Novae Group PLC is a Lloyds underwriting firm covering insurance and reinsurance in the property and marine, aviation and political risk markets.

Below is my analysis of the potential investment

They have been listed since the late 90s and are a solid company. What peaked my interest was their 52 week negative break out recently:

Novae Quarterly share price and volume

Looking at the financials as at 31/12/16, things are looking pretty good from a Value investing perspective.

If I take current assets of 533 mln and compare to short term creditors of 83.3 mln I am left with an excess of 449.7 mln.

Normally at this point I would take off long term liabilities, but this is an insurance company so we have to compare the long term provisions against insurable losses to the Fixed Investments amount. This is the “float” that Buffett talks about a lot with insurance companies – the fact that they get upfront premiums for events that may or may not happen in the distant future. Insurance companies therefore have a cash float with which they can invest.

Novae assess their long term liabilities to be valued at 1,982 mln vs their Fixed Investments valuation of 1,840, leaving an effective long term deficit, or liability of 142 mln.

If I take this figure away from the 449.7 mln excess I get a net net working capital of 307.9 mln, which is very close to the current market capitalisation of 362.39 mln. This is very close to being able to buy £1 of cash / cash equivalent for £1 in the market, taking account of very little future earnings or outperformance on underwriting outcomes. Financially it therefore looks like a bargain in my analysis.

So why is it trading at that price?

So far this is looking like an interesting trade. I now have to work out whether there is a good reason for the fall in share price.

Running down some of my checks:

  • Major Shareholders – some names I respect including M&G, AXA, Legal and General. Neptune Asset management sent out an RNS two days ago stating they had moved their position to in excess of 12% from the previously reported 8.33%
  • Review recent trading update on 10th May. Premiums up 13.8% at constant rates of exchange. Exiting of Casualty business where profits unsustainable shows management wiling to take action where needed. Company admitted that combined ratio likely to be above 100% – i.e. that premiums received would be lower than claims paid, reducing the overall “float”.
  • Dividends more than halved in 2016 vs previous 3 years
  • Underwriting loss in 2016, but that isn’t too unusual or extreme
  • Investor’s Chronicle changed their recommendation to sell a week ago – that means the herd has turned – positive for buying potential
  • CFO left company in October 2016 and then accounts were “restated” – reducing net assets by 13.5 mln. This implies a change of accounting policy to a less aggressive interpretation. Unfortunate but appears to be in process of being dealt with.

Final Analysis

There is some hair here, but it seems to me like a classic stock market overreaction. I’m not sure if this is a near-term winner, the charts would imply it may have some way to fall yet, but picking the bottom is not an art I’ve ever been any good at.

The absolute values of the company seem strong. The trading update stated that investment income was above target, and management are taking actions to exit less profitable sectors and clean up accounting policy.

Neptune taking their stake up to above 12% could mean a take over in the offing, but I’m not making the investment on that assumption as I think they are probably just seeing the same value that I see.

Overall I’m a fan of this one as I think the underlying cash and other current asset positions help to hedge against the share price falling too far.

Current price is 564p so I am putting in an after hours limit order at 559p to see if I can get better execution on the open tomorrow.

Good luck all.