1. The company
The Hungary-based CIG Pannonia Life Insurance Plc (BUD:CIGPANNONIA, Financial)(FRA:0CK, Financial) has had an increasing popularity amongst investors and speculants lately. The insurer and fund management company which operates in the life and non-life insurance segment regarding the insurance market looks attractive again. This is the only Hungarian insurance company with a developing, growing Central and Western-European presence (operating in Slovakia, Poland, Romania, Baltic states, Spain and Italy) and competitive products for domestic markets. The company returned to profit since 2015 and has paid a dividend since 2017.
Share price (Oct. 12, 2018): 410 HUF ($1 USD = 280 HUF)
Number of shares: 94,428 million
Market cap: 39.93 billion HUF
P/B ratio: 2.0
P/E in 2017: 11.3
Earnings per share in 2017: 40.6 HUF (earnings per share in first quarter and second quarter 2018: 15.1 HUF)
EV/Ebitda: 8.87
Dividend: 10 HUF per share
Dividend yield: 2.44 %
Return on equity in 2017: 40%
1.1. History
2008 May – The company was established by prominent Hungarian insurance experts, politicians and businessmen with the support of well-known U.S. investment bank Lehman Brothers. It had a successful partnership with Brokernet, one of Hungary’s largest financial agencies. It closed the business year with 4 billion HUF in revenue and became market leader in niche markets like regular-premium, unit-linked life insurance products -- a prosperous start.
2009 – CIG reached market leadership in niche markets like unit-linked insurance products with a 3% market share in domestic life insurance and 12 billion in HUF revenue. It continued the productive cooperation with Brokernet.
2010 – With a market share of 5.8% and 25.8 billion HUF in revenue, CIG Pannonia doubled its income. These successes made the company an appealing investment. It held its IPO on the Budapest Stock Exchange, which was a well-timed success.
2011-2015 – The stock was listed on BET's (Budapest Stock Exchange) prime market. Throughout the years, the company grew a profitable insurance and fund management company. On the other hand, 2015 was the year when CIG broke up with Brokernet, setting up an all-time low at 135 HUF. This event disappointed many individual investors and speculants.
2016-2018 – The stock became an unpopular investment due to past events. Even so, it built the fundamentals to become a big financial company, and it attracted another institutional investor. One of Hungary’s most prosperous holding companies, the Konzum Plc, bought a 24.85% stake in CIG, pushing up the stock price between 400 to 500 HUF.
1.2. Business model
Using an aggressive growth policy, it is operating mainly in the life insurance segment. Its leading and most profitable products are the pension insurance and unit-linked insurance. Its health care insurance is also getting more popular. It has recently cleared its product porfolio, cutting down on quantity to make it possible to concentrate on quality. Focusing on the niche markets of Europe is the key, according to the management, to increase competitiveness with such giants such as Allianz and Aegon. This may indicate a future market share gain in the life-insurance market.
Currently, CIG is sitting on massive amount of cash (8.2 billion HUF), which may make it capable of making future acquisitions. In this sector, there is no need to have physical, tangible products; inventory; and factories with production lines. The management cuts off the operational expenses, and using technology-based solutions makes the company far more efficient for the long term. This is a good way to keep operational costs low. A potential "AI revolution" could be really beneficial for the company and its shareholders.
2. Financial strength
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a) Five years financial data of the CIG Pannonia Insurance Company
b) * = With Konzum Plc’s direct ownership exceeding 20% limit; this is an extraordinary, one-off result due to the acquisition
The insurance company has a low-level debt rate. From 2014 to the second quarter of 2018, it has had a greater than 75% growth rate in total assets while keeping the long-term liabilities steady and decreasing short-term liabilities 25%. This indicates that the company has a strong financial base, with thriving gross margins. According to Random Capital brokerage firm's CEO, Ferenc Virag, the first five years of the insurance business is for building strong foundations. Making (good) profit in the insurance business takes time.
For the last four years, the calculated average price-earnings ratio is 12.3. Compared to the the Hungarian Stock Exchange (called BUX), which currently has a 11.5 price-earnings ratio, both seem to be undervalued. Comparing this to E.U.-based competitors, CIG Pannonia is a well-priced stock with low debt and a bright future ahead.
However, there is not enough historical data for making more consequences. I am waiting for a 35 HUF earnings per share for the business year 2018 and a 50% increase in dividends for the next year, based on the first and second quarter of 2018 results and the management’s communication.
3. Management
Gabriella Kadar, the current CEO of the company, worked from 1994 as a fund manager, marketing and business development director for ING and Deloitte Hungary and joined CIG Pannonia in 2009 as an alternative distribution channel director. She is very experienced in financial management. The founders, like Zsigmond Jarai and others, are experienced businessmen and businesswomen. Jarai established the Hungarian Stock Exchange and was a minister of finance. He currently works as an investment banker in London. Konzum Plc, the holding company of one of Hungary’s most succesful entrepreneurs, Lorinc Meszaros, recently bought a 24.85% stake in the insurer. If you invested in Konzum Plc at the start of the year in 2016 and held on to it, you would own a 100-bagger stock!
The management is performing well and experienced in the field. However, there is no public information about insiders' trades. The company has not introduced a stock buyback program yet. The management’s compensation seems to also be adequate (the exact numbers are not released). The company doesn't use stock options as payment.
4. Valuation
The hungarian analyst estimate for this stock is 484 HUF per share. This appears to me to be a very conservative estimation. The cooperation with Konzum may generate huge profits. However, there is no way to reckon these opportunities yet.
The Hungarian government’s Ministry of Health is working on a health care reform project. At this time, the Hungarian health care sector is government-based. According to OECD, 100% of the total population of Hungary is covered by tax-funded universal health insurance, organized by the state-owned National Health Insurance Fund, which seems to work inefficiently and may for this reason see radical changes in the future. At the present time, the Hungarian Ministry of Healthcare is working on health care reform.
On the other hand, the Hungarian insurance market was devastated by the 2008 crisis. Still recovering from this, the returns are getting better and better. The hungarian population has a huge amount of uninvested cash – an estimated 5000 billion HUF - which they mostly keep at home.
a.) Revenues of the Hungarian insurance companies (billion HUF); source: MNB, Portfolio
b.) Yellow columns: earnings after tax; red columns: ordinary profit
All in all, the CIG Pannonia insurance company has strong financial capabilities with low-level of debt. Without considering or, more likely, speculating about the future potential, the stock is still undervalued.
5. Risks
Possibly the biggest risk with the business is the significant competition. There are international giants in the Hungarian market, and this is a highly competitive and profitable branch of business.
The lack of transparency may be a considerable drawback, especially for foreign investors. It is harder to get valid data about the Hungarian market than it is about the U.S. and E.U. markets. Most news is not even translated to English.
Last, new tax rules on whole life, endowment and health care insurance products will be terminated in January of next year. This may occasionally slow down the growth. The Hungarian National Bank regulated the sector with the new "Ethical Insurance Concept" law installed on Jan. 1, 2017. Still, that year was the most succesfull in the last eight. So the new law may cause little harm to the business.
6. Outlook
According to the Hungarian National Bank’s research, the insurance business of Hungary has the potential to grow up to 100% in the next 10 years. There is great growth potential here. Most people are unsatisfied with the state-based health care insurance and are pessimistic regarding the pension system.
Using the stock market capitalization to GDP (Buffett indicator) market valuation model, the Hungarian stock market is slightly undervalued at 19.6 points.
a) Source: Fed economic data, World Bank
Due to the lack of historical data and additional informations, the valuation models like DCF, FCF and Graham Number do not work very accurately in this case. However, comparing it to another Hungarian-based financial companies may help us. If you invested in OTP Bank Plc (BUD:OTP) stock at the IPO in 1995 and kept holding it, you could have made a fortune (IPO price: 115 HUF; today’s price: around 9,900 HUF – now the yearly dividend is more than the IPO price!).
I believe that CIG Pannonia can also be a successful, multibagger investment at this price. This stock is not for daytrading or short-term investment. But likely it can become a great value investment opportunity in the next 10 or 20 years. I would definitely go long with it.
Disclosure: I do own shares in this company as a long-term investment.
For more information:
https://www.bse.hu/pages/company_profile/$security/CIGPANNONIA
https://www.cigpannonia.hu/en/investor-relations
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