Huntleys' Stock of the Week

Recommendations: Buy

QBE's current stock prices

Business as usual - Acquisitions galore!

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:

• QBE has tapped the equity market for up to $2.1bn to fund five, yes five acquisitions and buyback up to $1.25bn face vale of Tier 1 securities at a discount, in exchange for senior debt securities that provides balance sheet flexibility in the future.
• An accelerated fully underwritten institutional share placement will raise $2.0bn with a non-underwritten retail share purchase plan set to raise up to $100m. About 102m new shares issued at $20.50 will participate in the FY08 final dividend – we expect 69¢ per share. The issue price is at a 10.9% discount, the smallest discount in the recent spate of equity issues.
• Acquisitions are expected to be EPS accretive in year one. In the first full year, the five acquisitions are expected to produce gross written premium (GWP) of US$525m and net profit of US$175m.
• The weakness of the A$ has raised FY08 revenue targets from those provided in August with the 1H08 results. Assuming the current exchange rates persist through December GWP target is now up from $12.5bn to $13.3bn and net earned premium (NEP) from $10.8bn to $11.2bn.

• Consistently QBE management has demonstrated the ability to take risk and earn substantial profits with a return on equity comfortably above 20%. This is achieved via the combination of strict risk assessment and the pricing of that risk together with a conservative financial structure infused with prudent reserves.
• We retain our FY08 NPAT estimate with currency related gains offsetting the impact of an unhedged equities portfolio. The FY09 forecast is upgraded from $2.26bn to $2.35bn although EPS falls after the placement. Fair value falls from $36.65 to $34.00 and price triggers adjust accordingly.

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