04.12.2017

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Vienna Insurance Group confirmed at BUY, TP EUR 27.50 - Group harmonisation likely to trigger synergies

We remain buyers of VIG shares expecting that the started group harmonisation will likely trigger positive revenue and cost synergies. The strong macro tailwind should enable VIG to be more risk selective and we expect an improvement of the combined ratio from 97.5% in FY 17e to 96.9% in FY 18e and 96.4% in FY 19e.

We slightly hike our TP from EUR 25.50 to EUR 27.50 on somewhat higher TBVPS estimates (TBVPS 17e EUR 19.7) and higher ROE/PBV target multiples.

Our estimates are slightly above consensus and the company's mid-term target. In light of the general prudence in outlook statements of the company we qualify the targets as reassuring.

Following the release of 3Q 17 numbers, which were reported about in line with RCB and market expectations, we remain buyers of Vienna Insurance Group (VIG) shares. We slightly hike our TP from EUR 25.50 to EUR 27.50 on somewhat higher TBVPS estimates (TBVPS 17e EUR 19.7) and higher ROE/PBV target multiples. Our estimates for PBT 17e and 18e of EUR 441 mn and EUR458 mn remain broadly unchanged, but we hike our FY 19e PBT estimate slightly by 2% to EUR 493 mn on expected synergy effects from the recently started group harmonisation.

Group harmonisation likely to trigger positive revenue and cost synergies: In its agenda 2020 published earlier this year VIG outlined its goal to tackle cost synergies in the group. In the meantime, the insurer stated its intention to perform several mergers within the group and hence to start to harmonise its group structure: VIG announced its plan to merge two of its three Austrian subsidiaries, namely Wiener Städtische and sVersicherung, to merge its two Slovakian and two Serbian subsidiaries and all three Hungarian group companies. While we see restructuring costs compensating for most of the positive effects in the shorter term, we are of the opinion that harmonisation of the group structure should bring visible positive cost effects (back-office functions, claims handling, overheads, etc.)

Strong CEE top line growth: Generating >50% of the groups premium volume and >60% of PBT 1-3Q 17 in CEE countries, VIG strongly benefits from continued strong macro dynamics in the region. We forecast the high growth rates of 3-4% to persist in 2018-19e. In 1-3Q 17 CEE premiums were up by 8.7% yoy. The macro tailwind should enable VIG to be more risk selective and we expect an improvement of the combined ratio from 97.5% in FY 17e to 96.9% in FY 18e and 96.4% in FY 19e.

Valuation; TP hike to EUR 27.50: VIG currently trades on a PER 17e of 11.7x about in line with its peers and at a premium of around 15% for FY 18e and FY 19e after adjusting for hybrid coupon payments. On PBV multiples VIG trades at a discount (17e-19e 0.7x vs. peers of 0.9x), but the group generates a significantly lower ROE of roughly 6.0-6.5% vs. 9-10% of its peers. We calculate a TBV 17e of EUR 19.7 representing a current multiple of 1.26 vs. the peers figure of about 1.5x (ROTE of 11-12% vs. the peersapprox. 15%). We calculate our new TP of EUR 27.5 as a weighted average of a ROE/PBV regression, peer group PE multiples, a ROTE/TBV equation and a DDGG model. We derive the highest fair value using the DDGG model (EUR 34, TV PBV 0.8x, DPS 17-25e of EUR 0.80-1.20, TVCOE 8.5%, TVROE 7.0%), and the lowest fair values are calculated when stressing a ROE/PBV regression (EUR 22) given the below-average ROE. Peer group PE multiples yield EUR23 and the COTE/ROTE equation (COTE 8.0%, ROTE 17-19e 10.7-12.4%) EUR 30. At our TP of EUR 27.50 VIG shares would trade at a P/TBV multiple of 1.3x.

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VIG

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