Genworth Mortgage Insurance Australia Limited

Company Overview: Genworth Mortgage Insurance Australia Limited (ASX: GMA) provides Lenders Mortgage Insurance (LMI) services to the residential mortgage lending market, under the authorisation from APRA. It has over 50 years of history of operation in the Australian residential mortgage lending market.

GMA Details

Turnaround in Bottom-line Performance in 1HFY21 Driven by Recovery in Economy: The company states that it has ~52% of the Australian high loan to value ratio (HLVR) market share with respect to Gross Written Premium for the year ended 31 December 2020. The company has delivered an uptick in business performance in H1FY21, on the back of a recovery in the economy.

Improvement in Economy:

• There has been an improvement in the unemployment and house price trend in H1FY21, with key economic indicators ahead of central estimates.
• GMA’s profitability has a direct correlation with the macro environment, which is expected to improve going forward.

View on H1FY21 Performance:

• GWP grew by 1% in H1FY21 to $289.7 million, compared to the pcp. The growth was aided by higher LMI flow volumes across lenders' customers and having a quality underwriting portfolio.
• There was an increase of 3% in the NEP to $170.9 million in H1FY21, on the back of an increase in GWP.
• Underlying NPAT stood at $76.4 million during the period.
• It declared an unfranked interim dividend of 5 cents per share in H1FY21.
• Prescribed capital amount (PCA) coverage ratio stood at 1.74x, which is above the Board’s target range of 1.32x to 1.44x.

The Group has maintained a decent balance sheet with a total of $3.6 billion in cash and investments as of 30 June 2021. It ended the period with a cash balance of $89.6 million and interest-bearing liabilities of $188 million during the same period end.

Cash Balance Trend (Source: Analysis by Kalkine Group)

Changes in Substantial Holdings:

As per a recent update, UBS Group AG and its related entities have undergone a change of initial substantial holding in the company with a voting power of 5.05%, representing 20,842,559 securities.

The company’s Director, David Andrew Foster has also undergone a change of indirect interest in the company and has acquired 4,273 ordinary shares for a total consideration of $9,998.82, on 10 August 2021.

Top 10 Shareholders: The top 10 shareholders together form around 31.91% of the total shareholding, while the top 4 constitute the maximum holding. Australian Ethical Investment Ltd.   and Vinva Investment Management Limited are holding a maximum stake in the company at 7.32% and 5.10%, respectively, as also highlighted in the chart below:

 Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics: The investment ratio of the company stood at 0.6% in H1FY21. There has been a slight improvement in the debt-to-equity ratio of the company to 0.14x as of the end of H1FY21 period, compared to 0.15x as of end of H1FY20 period.

Growth Profile and Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Economic Risk: The Group is exposed to economic risk, which might accelerate the claims activity, impacting the company’s performance.
• Underwriting Risk: The risk involves geography risks, policy constraints such as loan to value ratio, loan size, etc., to name a few.
• Regulatory Risk: The company’s performance is prone to the changes in regulatory measures. Any adverse change to it might impact the performance of the company.

Outlook: GMA has been working out strategies with its lenders customers in order to improve on the LMI value proposition for its home buyers. It has a well-diversified portfolio with average maturity age of 4.2 years. The company will focus on quality of underwriting going forward and look for profitable customer renewals. The recent initiatives by the Federal and State Government to support borrowers, augurs well for the company and is expected to have a positive impact on the claims. It has relationships with over 50 lender customers, which comprise of banks, credit unions, mortgage originators, to name a few, and will look to further diversify its customer base.

Valuation Methodology: P/E Multiple Based Relative Valuation (Illustrative)

Source: Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: On 29 June 2021, the company has updated that it has been advised by the Commonwealth Bank of Australia (CBA) to issue an RFP with regards to its LMI requirements. The present exclusivity agreement of CBA with Genworth will expire on 31 December 2022. As per ASX, the stock of GMA is trading above its average 52-weeks’ levels of $1.315-$3.090.   The stock of GMA gave a positive return of ~35.15% in the past one year and a negative return of ~23.63% in the past six months. The stock has been valued using a P/E multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at a slight discount to its peers’ average, considering the key inherent risks in the sector, volatile business environment due to the COVID-19 pandemic, and further uncertainty due to widespread lockdowns in its key markets. For the purpose of valuation, few peers like Resimac Group Ltd (ASX: RMC), Australian Finance Group Ltd (ASX: AFG), MyState Ltd (ASX: MYS) have been considered. Considering the expected upside in valuation, decent performance in H1FY21, growth in gross written premiums & NEP’s, stable balance sheet position, expected economic recovery and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $2.215, up by 2.07% (as on 16 August 2021, 10:29 AM (GMT+10), Sydney, Eastern Australia).

GMA Daily Technical Chart, Data Source: REFINITIV

Note 1: The reference data in this report has been partly sourced from REFINITIV

Note 2: Investment decisions should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the analysis has been achieved and subject to the factors discussed above alongside support levels provided.

Technical Indicators Defined: -

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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