Ben Temkin
30 September 2008
column
Johannesburg — THE shares of Metropolitan Holdings (MetLtd) have to be a buy. This view is notwithstanding that the company is in the life insurance sector and there is a global financial crisis.
My starting point for this conclusion is in the text of the commentary on the results for the half-year ended June 30, published on September 3.
Over the half-year, diluted core headline earnings rose 14% to 70,03c from the comparable half-year figure of 61,28c. This earnings growth was an acceptable criterion for the Private Investor portfolio.
The directors said the diluted core headline earnings growth "was partially assisted by a further reduction of shares in issue -- a direct result of ongoing capital management activities". They were, of course, referring to its continuing share buy-back programme.
When last week I wrote about Sasol's buy-back share programme, I referred to some previous remarks about Metropolitan's buy-back programme which employs its embedded value as a target for value.
Unfortunately, I transposed -- and made nonsense of -- some of my own text. I can't unprint this but I should have written: The success of a share buy-back programme depends on buying back shares at a price below their value. If the embedded value per share is higher than its share price, there is value in buying back the shares.
As I have written several times, embedded value is a shifting measure and, therefore, a shifting target for value. In calculating the present value of future profits, the future value of the profits of the policies in force has to be discounted. The risk discount rate has to be realistic and, therefore, has to relate to a current perspective. In the latest half-year, the directors report the risk discount rate was increased by 2,5 percentage points. This increase, they say, was the largest increase in a single reported season since embedded value reporting was introduced in SA in 1998.
In calculating the base present value of in-force business, the company reviews all its future assumptions, which include expected deaths, discontinuances of policies, investment returns and the risk discount rate. Any changes in assumptions affect the base embedded value.
MetLtd reports on the effect of major assumptions. For example, at the end of financial 2007, its base net embedded value of its in-force business was R4,42bn. A change of one percentage point in its risk discount rate would have reduced this in-force base about 10% to R4,03bn. A change of 2,5 percentage points would, therefore, have reduced embedded value by R1bn. The higher discount rate used in the latest half-year was partly compensated, among other things, by the large inflow of new business and higher than expected investment returns. At the end of June, diluted embedded value was R12,19bn, marginally lower than the R12,6bn at the end of December.
Diluted embedded value at the end of June was R18,38 per share compared with R18,57 six months earlier.
In May last year, the share price almost reached R17, still at a discount to embedded value. Now the share is trading near R12, which is a 35% discount on embedded value. On this basis alone the market is grossly undervaluing the shares.
Be the first to Write a Comment!
Copyright © 2008 Business Day. All rights reserved. Distributed by AllAfrica Global Media (allAfrica.com). To contact the copyright holder directly for corrections — or for permission to republish or make other authorized use of this material, click here.
AllAfrica aggregates and indexes content from over 125 African news organizations, plus more than 200 other sources, who are responsible for their own reporting and views. Articles and commentaries that identify allAfrica.com as the publisher are produced or commissioned by AllAfrica.
