Huntleys' Stock of the Week

Recommendations: Accumulate

QBE's current stock prices

Strong A$ creating havoc with guidance

Investment Rating:

QBE is one of the best managed insurance groups in the global general insurance and reinsurance industry. An enviable track record of strong earnings with a minor blemish following the events of September 11, 2001 is testament to a first class business model and conservatism. Extensive risk management is in place to protect all stakeholders. Throughout QBE diversification is used to reduce the overall risk profile by spreading exposures by product and geography. Overlaying fundamental procedures and strategies is a level of prudence providing significant comfort. A growth strategy based on the combination of organic growth and insightful acquisitions has and should deliver well above average growth in earnings and dividends. QBE is an excellent stock for inclusion in long term growth portfolios.

Event:

• The strength of the A$ is proving a real nuisance.
  
  
• The strength or volatility in the A$ is playing havoc with QBE's sensitive Gross Written Premium (GWP) and Net Earned Premium (NEP) guidance. It impacts the underwriting profit, insurance profit/margin and ultimately NPAT estimates. Currency movements impact premium income when translated into A$.
  
  
• With operations in 45 countries approximately 76% of QBE GWP revenue is derived in currencies other than A$. A 5% movement in A$ against all currencies is estimated to impact projected FY09 NPAT by around $80m. The largest exposures are to US$ and British pound. QBE's FY09 GWP and NEP growth forecasts are based on A$/US$ of 0.68 and A$/0.45 British pounds. The A$ is currently near 0.81US$ and 0.50 British pounds.

Impact:

• Should the A$ remain at current levels - US80c and 0.50 British pounds - the FY09 growth guidance for GWP and NEP reduces from 20-25% to around 9%.
  
  
• No one really knows where the A$ is going to settle between now and December 2009. With the recovery in the Chinese economy underpinning commodity prices and the continued interest rate differential in favour of the A$, a substantial fall back to near US70c appears unlikely.
  
  
• We reduce our FY09 NPAT estimate from $1.95bn to $1.75bn. EPS declines from 194.0c to 174.1c. DPS is trimmed from 128c to 126c. The FY10 forecast is also trimmed from $2.2bn to $1.92bn with EPS reducing from 214.6c to 187.3c and DPS from 132c to 126c. These estimates do not allow for any acquisitions although any positive impact is usually not immediate. Fair value declines from $28.15 to $25.25 and price triggers adjust accordingly.

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