Management Update
July 9, 2015
Crescent Star Insurance Limited (CSIL)
Bullish Future Outlook through High-growth Business Diversification and Technology
CSIL PA
Financial Performance
Recommendation
NA
Target Price
Current Price
NA
13.3
Upside (% )
Bloomberg Code
NA
CSIL PA
62
35%
Shares (mn)
Free float (% )
Market Cap. (PKR mn)
827
Market Cap. (USD mn)
Major Shareholders
Weavers Pakistan (Pvt) Limited
Relative Performance
3M
6M
12M
Return %
229.1
167.7
161.4
Avg. Volume (mn)
0.61
0.42
0.20
High Price - PKR
13.3
13.3
13.3
Low Price - PKR
4.1
3.5
3.5
Price Performance
280%
CSIL
KSE100
240%
200%
160%
120%
80%
40%
Jul-14
Industry Overview: The industry is greatly focused on increasing
awareness of insurance coverage within the country. Given huge growth in
autos alongside introduction of new variants, potential for higher insurance
coverage is present. In the new technological era, the industry seems to
pose a brighter future for insurance companies.
CSIL Core Business Revenues: After restructuring in 2014, the company is
finally compliant and has met its capital requirements, which were partially
made through the right shares issue of 412.5% at PKR 6 per share, discount
of PKR 4, boosting the companys issued share capital to 62 million shares.
As a result of increased insurance coverage from the health/auto sectors, net
premium revenues for the company grew by a staggering 454% YoY during
1QFY15 as compared to same period in the preceding year. After
restructuring in 2014, the company has started realizing its large share of
unearned premium, recorded at PKR 115 million in FY14 as compared to
only PKR 28 million in FY13, hence further augmenting net premiums.
Improved Core Profitability: The striking increase in the companys
underwriting result, an unprecedented 873% YoY increase during 1QFY15
as compared to the preceding year, is due to a stronger handle on
management expenses with respect to growth in premiums. In addition,
st
introductions of new products such as CSI Car Asan on 1 April 2015, along
with other new diverse products such as the companys underwriting of
approximately 5,000-10,000 green and yellow cabs in Lahore is expected to
increase core profitability. Companys bottomline has also turned into profit of
PKR 10.3mn during 1QFY15 from a loss of PKR 14.1mn in the same period
last year.
Better Investment Income: The company, in 2014, timely increased its
investments exposure into fixed income instruments, mainly in the PIBs with
maturity in 2017, to the tune of PKR 75mn (87% of total investment portfolio),
which with massive decline in interest rates yielded better investment income
in 1QCY15. The rate on which the PIBs were bought at stood at 11.25%
while the current rate of similar maturities are hovering at ~8%, hinting at
further gains from the major portion of companys investments. This is
expected to support company profitability further in addition to likely
improvement in in core insurance income.
CSIL Progress over time: The Companys rating has significantly improved
from a BBB+ to A-, by PACRA, indicating improved abilities to meet
insurance obligations. A higher rating should lead to easier access to credit
lines from banks at cheaper rates, in turn, providing the company with more
sources of finance. The companys investment properties stood at a book
value of PKR184mn with an estimated fair value of PKR 419mn, as per the
company financials. If sold, the property is expected to generate a potential
gain of PKR 229mn, or 127%. The profit from the sale of property can be
served as a major source of finance for future projects (mentioned ahead)
and translates into a one-off gain of PKR 3.7/share!
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
Feb-15
Mar-15
Apr-15
May-15
Jun-15
Jul-15
Source: Bloomberg
Analyst:
AHL Research
D:+92 21 3246 2589
UAN: +92 21 111 245 111, Ext: 242
F:+92 21 3242 0742
www.arifhabibltd.com
Management Update
July 9, 2015
Future Outlook Business Diversification into High-growth Ventures
Golden Chick: The company plans to invest approximately PKR 70 million in its wholly-owned subsidiary,
Crescent Star Foods (CSF), and is set to bring Texas-based US fried chicken chain, Golden Chick, to Pakistan.
Through CSF the company is expected to offer 7 million ordinary shares at PKR 10/share, and is planning on
retaining 30% shares of the newly owned subsidiary, as per the financials. The first outlet is expected to open by
1QFY16. The initial plan is to open up 3 outlets with an expansion target to 30 within the next 10 years (or done
much earlier depending upon the growth and returns). Given the high demand for chicken, approximately
864,000 tones, in Pakistan together with KFC being the only major competitor dealing purely in chicken while
offering only fried chicken, the venture seems ideal to target Pakistans consumption-driven population with
improving per capita thru soft inflation given weak oil price outlook. Interestingly, the venture is expected to take
up much of the market share based on: i) new brand with expectedly much better service and ambiance than its
competitors to attract young population (under 20s being about 50% of the population), and ii) offering both the
Chicken Roast as well as Chicken Fried ranges, unlike any other chicken brand offerings in Pakistan. Further,
beside Pakistan market, Golden Chick license covering GCC should serve as an edge to CSF, thus capitalizing
huge growth potential in the GCC.
Dost Steels Limited: CSIL will also be the underwriter (3QFY16) of
shares worth up to PKR 450 million of Dost Steels Limited (DSL),
Venture into the food business through Golden
which is expected to be a major market player in the steel industry in
Chick. Tapping into immense potential present
in the food industry in Pakistan.
the near future. DSL currently has a plant to manufacture direct
reduced iron, sponge iron, hot briquetted iron, carbon steel, pig iron
and special alloy steel in different forms. The company also has the
ability to manufacture hot rolled high tensile and allied products. DSLs
major focus is on reinforcement bars (REBARS). It is the largest reHaving a slice of the steel pie! Decision to
underwrite and inturn hold 37.39% of Dost
rolling mills in Pakistan which has the capacity to produce 350,000
Steel Ltd. is indicative of strong future growth
tons of high strength rebar annually. Moreover, DSL is in collaboration
as the higher demand for steel products is
with Siemens and Ansaldo, both leading companies in R&D, which
indicative of major growth in this sector.
help provide state-of-the-art hot rolling mill plants. DSLs unique Bar
Quenching technique helps it produce top quality superior products
which will help it stay on top of the market. The project is expected to
Going into the tracker business through a
be commercially viable by Mar 30, 2016, as per discussion with the
100% ownership of its upcoming tracker
business. named Crescent Start Tracker
management, since most of the ~PKR 800mn loan-related
(Private) Ltd. Given the rapid rise in motor
restructuring issues have been resolved with the consortium of banks.
vehicles this sector also shows great promise.
CSIL is expected to hold 37.39% of DSL which will help it reap benefits
in the shape of future profits guaranteed by a burgeoning steel
industry. Further, the steel plant is ideally located in the Punjab
Increase use of technology will also be crucial
province where most of the construction and infrastructure
in creating more diverse products and
furthering the awerness of insurance products
development activities are taking place while given the initiation on
in Pakistan.
China-Pakistan Economic Corridor, DSL is expected to have benefit
the most from expected rise in steel demand.
Crescent Star Tracker: With an investment of PKR 25mn, CSIL is expected to hold 100% of its new venture,
Crescent Start Tracker. This venture will help take advantage of the growing transportation sector in Pakistan
resulting in increased demand for trackers and associated devices. The plan is to start from Oct-15, and is
expected to be completed by Sep-16.
Technology Upgrades: Given the rapid use of technology in the insurance sector in 2015,
the company itself is investing huge sums in technology and products to be sold through technology. Use and
advancement in technology will help the company tap into markets for individual clients in the health/travel
sectors and other growing areas of microfinance. It will also help reduce management expenses and increase
front-end and back-end efficiencies, resulting in better business margins. Moreover, through technology more
products will be accessible to the public hence increasing awareness for insurance products.
Management Update
July 9, 2015
Crescent Star
Insurance Ltd-Product
Matrix & Market Share
as of 2014
Fire Property &
Damage-Provides
coverage against fire,
lightning, explosions
etc. It accounts for
3.5% of the total
product share
Motor-Provides
coverage against
theft, accidental
damage etc. Accounts
for 56% of the product
share.
Marine Aviation &
Transport-Provides
coverage for goods in
transit for both import,
export and inland.
Accounts for 9% of
the total product
share.
Exhibit: Valuation (Regional/Local Peers Weighted Average)
Multiples
P/E (x)
Accident & HealthProvides a
comprehensive health
benefit plan. Accounts
for 29% of the product
share.
DY (%)
Others- Includes
insurance against
natural disasters etc.
Accounts for 2.5% of
the product share.
ROE (%)
P/B (x)
Insurance
13.8
Weighted Average
1.6
19.8
2.3
Tracking
15.0
0.3
9.2
0.7
Steel
17.3
0.2
3.9
1.6
Food Chains
20.8
3.2
30.4
8.6
Source: Bloomberg, AHL Research
Exhibit: Blended FV
Insurance
Tracking
Steel^
Food Chains
Weighted Avg. P/E
Equity Value
(PKR mn)
352.0
39%
CSIL
Stake
100%
Sector
P/E
13.8
Weight
Weighted
P/E Est.
5.4
Est.
EPS*
0.7
25.0
3%
100%
15.0
0.4
0.0
450.0
50%
37%
17.3
8.7
0.3
70.0
8%
30%
20.8
1.6
0.1
16.1
1.1
897.0
Estimated FV (PKR/share)
18.0**
Source: AHL Research, *Based on Estimated Annual Return on Equity for each New Business Venture, ^Up to PKR 450mn
**assuming new ventures commence within 1-1.5 years as stated
Value Analysis
The Valuation technique used to estimate the expected/indicative/targeted PE multiple for CSIL is Sum of The
Parts RoE methodology. The technique in essence makes use of regional and local price earnings multiples to
derive the firms expected/estimated/targeted multiple incorporating returns on its various business ventures;
including food, tracking and steel, which are expected to be added in the near future.
For the insurance aspect of CSIL, we made use of a mix of regional and local multiples of the insurance industry.
The resulting benchmark PE multiple attributed for the insurance segment comes out to be 13.8x.
CSILs expected tracking business constitutes an investment value of PKR25 million in Crescent Star Tracker
(Private) Limited. With a 100% stake in the company, we derive the companys EPS conservatively by taking an
estimated average estimated ROE of only 10%. We use a mix of regional and local multiples of companies
capped under USD100mn of the size, to arrive at targeted PE multiple of 15x.
CSILs venture in the food business is comprised of an initial investment of PKR70mn in the Texas-based U.S
fried chicken chain, Golden Chick. According to the management, CSIL is expected to hold 30% of this venture
Management Update
July 9, 2015
eventually. The PE multiple of this business can only be driven through regional peer multiples. The resultant
targeted PE for the food business clocks in at a conservative PKR 20.8x.
CSILs largest investment of up to PKR450mn is expected to be made in DSL through right issue, with a holding
of 37.4%. For our calculations, we removed anomalies in a list of approximately 200 regional/local steel firms. As
of now, we have made a conservative ROE assumption of only 4% by taking an average of the positive RoEs of
the local and regional companies. The resultant targeted PE multiple for the business stands at 17.3x.
Finally, if we take the summation of all the relative portions of the targeted PE multiples, it gives us an
expected/estimated annualized EPS of PKR 1.1 while a targeted multiple of 16.1x for CSIL, resulting in an
indicative FV of PKR 18.0/share, provided all the said business ventures of the company go through smooth as
expected.
Exhibit: Financial highlights
(PKR mn)
1QCY15A
1QCY14A
YoY
CY14A
CY13A
YoY
CY12
CY11
YoY
Gross Premium
46
21
117%
237
85
179%
68
79
-14%
Net Premium Revenue
86
16
454%
136
56
144%
41
60
-32%
Net Claims
21
555%
25
14
79%
12
18
-36%
Management expenses
19
13
42%
69
31
122%
20
20
-2%
Net Commission
18
514%
23
422%
-54%
Underwriting Result
29
-4
NM
19
212%
16
-58%
Investment Income
307%
-19%
1437%
General and other admin exp.
20
11
78%
63
32
99%
31
19
64%
Profit before tax
11
-14
NM
-34
-NM
-18
NM
10
-14
NM
-36
NM
-18
NM
0.17
(.23)
NM
(0.58)
0.02
NM
(0.29)
0.02
NM
Profit after tax
EPS (PKR) @ 62mn shares
Source: Company Financials, AHL Research
Exhibit: Key Financial Ratios
1QCY15A
1QCY14A
YoY
CY14A
CY13A
YoY
Profitability (%)
PBT/Net Premium
PAT/Net Premium
Combined Ratio
Management Expenses/Net Premium
Underwriting Result/Net Premium
Net Claims/Net Premium
Investment Income/Net Premium
12.9
11.9
65.3
21.7
33.3
24.3
2.5
(89.5)
(90.5)
265.2
84.6
(23.9)
20.6
3.4
NM
NM
(200)
(62.9)
NM
3.8
(0.9)
(25.3)
(26.3)
140.4
50.7
14.0
18.5
4.9
3.7
2.6
121.1
55.9
11.0
25.3
14.6
NM
NM
19.4
(5.2)
3.0
(6.8)
(9.7)
Return To Shareholders
ROE- PBT (%)
ROE- PAT (%)
EPS- PKR
P/E Ratio (Times)
ROCE (%)
ROA (%)
BVPS- PKR
P/BV (x)
3.1
2.8
0.2
55.8
2.5
1.8
5.8
1.6
(4.0)
(4.0)
(0.2)
(40.6)
(3.4)
(2.5)
5.7
1.6
NM
NM
NM
NM
NM
NM
0.0
(0.0)
(9.8)
(10.2)
(0.6)
(16.0)
(8.3)
(6.2)
5.7
1.6
2.3
1.7
0.0
390.6
2.0
0.9
1.4
6.5
NM
NM
NM
NM
NM
NM
3.0
(0.7)
0.2
110.6
0.0
64.7
0.0
107.9
0.0
61.3
4.7
2.8
(0.1)
3.4
0.2
107.9
0.0
61.3
0.3
73.4
53.8
(0.3)
34.5
Liquidity/ Leverage
Total Assets Turnover (x)
Paid-Up Capital/Total Assets (%)
Debt/Equity (x)
Equity/Total Assets (%)
Source: Company Financials, AHL Research
7.5
Management Update
July 9, 2015
About the Company
Major Shareholders -2014
Crescent Star Insurance Company Limited (CSI) was formed
in 1957 and through its strong underwriting standards has
gained a reputable standing in the insurance industry. CSI is a
registered insurer with the Securities & Exchange Commission
of Pakistan with a paid up capital of PKR 621 million. The
company is listed on the Karachi and Lahore Stock
Exchanges. It is also a member of Insurance Association of
Pakistan (IAP).
After Restructuring of the company the major shareholding
has been transferred from the Millwala Company to a group of
individual sponsors.
Directors &
Spouses &
ExecutivesSakib
Berjees
6%
Pak istan
Reinsurance
Company
Ltd. (PRCL)
1%
Assosciated
Companies
62%
General
Public
(Local)
29%
Others
2%
Disclaimer: The information contained herein is compiled from sources AHL believes to be reliable, but we do not accept responsibility for its accuracy or completeness. It is not intended
to be an offer or a solicitation to buy or sell any securities. AHL and its officers or employees may or may not have a position in or with respect to the securities mentioned herein and they
do not accept any liability whatsoever for any direct or consequential loss arising from the use of this publication and its contents. AHL may, from time to time, have a consulting
relationship with a company being reported upon. All opinions and estimates contained herein constitute our judgment as of the date mentioned in the report and are subject to change
without notice.
