While Canadian property and casualty insurance companies have enjoyed steep gains already in 2024, National Bank Financial analyst Jaeme Gloyn sees the potential for further near-term share price appreciation.
“Our view that the combination of hard market conditions, moderating inflationary pressures, and higher investment income would create a strong setup for our P&C insurance coverage has largely played out as expected,” he said. “Our P&C coverage has gained 36 per cent year-to-date on average, outperforming the S&P/TSX Composite Index (up 17 per cent year-to-date) and the TSX Financials index (up 21 per cent). While multiple expansion through 2024 has brought valuations toward historical highs, we continue to see upside as we expect the record catastrophe year to maintain the currently firm market conditions, and continued inflation moderation to drive enhanced profitability facilitating ROE expansion.”
Mr. Gloyn thinks the “record-setting” catastrophe events in 2024 are likely to alleviate investor concerns that rate increases seen through the industry over the past two years “may decelerate and provide incremental visibility for continued robust personal lines premium growth into 2025.”
“Combined with rate increases implemented in H1 in response to elevated claims inflation, we believe the outlook for premium growth remains robust,” he said. “We maintain a favourable view on the mid-term profitability set-up, with the potential for M&A to enhance the outlook. Our pecking order remains FFH, TSU, DFY and IFC, largely reflecting near-term valuation upside.”
In a research report released Wednesday previewing third-quarter earnings season for Diversified Financials, Mr. Gloyn revised his estimates and price targets for many of the companies in his coverage universe. He also named six companies with “upside potential as we enter 2025.” They are:
* Element Fleet Management Corp. with an “outperform” rating and $37 target (unchanged). The average target on the Street is $31.47, according to LSEG data.
Analyst: “We selected EFN as a top pick for 2024 as we saw a ‘beat and raise’ story developing on the back of 1) the order backlog driving high-margin revenue upside, 2) continued execution on organic growth strategies, and 3) mega-fleet wins not baked into guidance or consensus estimates. These remain key aspects of our thesis, but subsequent marketing meetings with management in May and the Mexico investor visit in September both further enhanced our confidence in Element’s growth outlook ... We see the current FCF [free cash flow] yield of 7 per cent on 2025 estimates as an attractive entry point. We believe double-digit growth in EPS and FCF will drive compression in the FCF yield to the low to mid-single digits in line with other high-quality peers.”
* goeasy Ltd with an “outperform” rating and $240 target, up from $235. Average: $225.29.
Analyst: “Shares of GSY have dropped 7 per cent since releasing preliminary guidance on October 21st , and 14 per cent from its 2024 highs in July. We believe the recent decline in share price creates a compelling buying opportunity as we approach Q3 results. We believe the lower revenue yield guidance (33-34 per cent vs. 34-35 per cent previously) and concerns on credit have contributed to the recent sell-off, but we are not concerned with either. The revenue yield was driven by three factors: 1) a faster mix shift to lower-yielding secured loans (which is part of the long-term strategy and factored into GSY’s 3-year guidance), 2) higher non-performing loans and more aggressive collections tactics that cause more loans not to accrue interest, and 3) management likely building in a degree of conservatism ..... . With credit improving and the softlanding macro backdrop becoming increasingly likely, we see this as an attractive opportunity to buy a midteens grower at a discounted multiple.”
* Fairfax Financial Holdings Ltd. with an “outperform” rating and $2,200 target, up from $2,100. Average: $1,995.65.
Analyst: “While one of the strongest performers in our coverage year-to-date, up 44 per cent vs. the TSX Financials index up 20 per cent, we continue to see upside for FFH. With Q4-23 results FFH upgraded its annual operating income guidance by over 30 per cent to $4-billion, consisting of $2 billion from interest and dividend income, $1.2-billion in underwriting profit and $750-million from associates and non-insurance. Two quarters later, the conservatism in this guidance has become clear. As of Q2, run-rate interest and dividend income has already reached $2.2-billion, plus underwriting income and associates and non-insurance are tracking above guidance. Strong H1 results and deployment of excess capital to drive ROE accretion increase our confidence that operating ROE in the mid-teens is sustainable and a valuation re-rate is warranted.”
* ECN Capital Corp. with a “sector perform” rating and $2.50 target (unchanged). Average: $2.47.
Analyst: “After a challenging start to the year, we believe ECN is a name to watch as we approach 2025 and we begin to see signs of a better road ahead. Q2 results in the Manufactured Housing segment showed improvement, approvals were up 25 per cent year-over-year, Skyline JV is picking up speed as balances doubled q/q, industry data is showing mid-teens shipment growth through Q3, and Q3 results from peers that have reported show double-digit volume growth (e.g., Champion Homes (SKY: NYSE).”
* Brookfield Business Partners LP with an “outperform” rating and US$33 target (unchanged). Average: US$30.89.
Analyst: “We believe BBU is well set-up for a strong finish to 2024 and the start of 2025. Previous concerns on the impacts from the cyberattacks at CDK Global are in the rear-view mirror which sets the stage for strong results and a lower rate environment to push shares higher. BBU has a solid runway to drive value through operational improvements as 50 per cent of its businesses were acquired over the last three years. ... BBU trades at a 46-per-cent discount to NAV (61 per cent excluding a potential Clarios monetization at US$10/unit of value), which is expected to nearly double over the next three to five years through increases in FCF and capital recycling. Further rate cuts and progress on operational improvements could narrow the discount, turning BBU into a top performer.”
* Trisura Group Ltd.with an “outperform” rating and $67 target (unchanged). Average: $57.89.
Analyst: “We moved Trisura up our pecking list in Q1-24 as we believe TSU is set up for a strong recovery in 2024. After a challenging 2023, the story is significantly de-risked following an upgraded AM Best outlook and costs associated with the run-off firmly in the rear-view mirror. This derisking shifts the focus to operating performance, where the outlook remains strong. The investor day in June confirmed our view that Trisura will deliver high-teens operating EPS, adjusted ROE and book value per share growth in the coming years.”