value and opportunity

April SA is a french specialty insurance and insurance brokerage company.

Currently, the company looks kind cheap, however not super cheap compared to other Insurance companies. Traditional ratios are:

P/E 7.4
P/B 1.1 (P/B tangible 2.4)
P/S 0.64
Div. Yield 3.9%

(CF multiples are not making sense as with most financial companies)

If one looks at the larger Insurance companies, for instance the French companies like AXA and CNP, April looks kind of expensive. Those companies are trading currently at 5x P/E and around half of their book value and 6% plus dividend yields, so why bother ?

The picture changes if we look at the last 11 years of earnings and profitablity. In contrast to any other Insurance companies, April shows consistent earnings growth and double digit margins as well as impressive return on equity:

	TRAIL_12M_EPS	Profit Margin	ROE
1999	0.37	11.2%	34.1%
2000	0.53	11.9%	35.1%
2001	0.63	10.9%	31.0%
2002	0.67	10.1%	26.4%
2003	0.57	7.3%	21.0%
2004	0.88	10.2%	28.7%
2005	1.33	11.6%	31.9%
2006	1.60	12.0%	29.7%
2007	1.77	11.3%	26.9%
2008	1.49	8.0%	19.9%
2009	1.79	8.6%	20.4%
2010	1.96	10.1%	19.0%

So why is April so much more profitable than CNP, AXA etc ?

The answer seems to be simple:

1. April specialices in certain areas only, like additional health insurance, international health insurance etc. They don’t compete for loss making commodity products like car insurance

2. Even more important, the majority of April’s revenues are actually insurance brokerage commissions, which in contrast to insurance itself is a high margin, low capital reqirement business

Unfortunately, there are not many listed insurance brokers available, most of them are US based. But still, I wil use them for our “sum of the parts” valuation approach.

In the following table one can find the listed insurance brokers with valuation multiples:

Name	P/E	P/B	P/S	ROE LF	PM LF
WILLIS GROUP HOLDINGS PLC	13.2	2.4	1.9	10.7	7.9
AON CORP	14.8	1.8	1.4	13.3	7.3
ARTHUR J GALLAGHER & CO	24.5	3.0	1.8	14.2	8.3
MARSH & MCLENNAN COS	17.4	2.6	1.5	14.7	4.6
HANCOCK HOLDING CO	15.6	1.1	2.5	4.5	12.6
BROWN & BROWN INC	19.6	1.9	3.0	10.3	17.0
ERIE INDEMNITY COMPANY-CL A	30.9	4.4	0.8	17.2	6.2
GJENSIDIGE FORSIKRING ASA	11.4	1.5	1.6	13.1	14.2
Avg	18.45	2.34	1.81	12.26	9.75

It is interesting to see that none of the big guys comes close in profitablity, nevertheless, the market awards them with much higher multiples than April.

Sum of parts valuation

Normally, one would now look up the segment reporting in April’s annual report , search for the business segment reporting, multiply the segment profits with the segment multiples and simply add up the values.

However, being a French company, April makes things more difficult by only reporting the segments “Life & Health” and “Property & Casualty” like a traditional Insurance company an not by Insurance and brokerage.

What they do however is reporting at least the split between Insurance premiums and brokerage commissions (page 129), which in 2010 were 276 mn EUR insurance premiums and 446 mn EUR brokerage commissions.

So now we can do only a very simple “sum of parts” valuation based on the P/S comparables.

A quick check on European Insurers gives us an average of 0.3 P/S valuation.

So putting it together, based on 2010 data we would get a valuation of:

Insurance: 276 mn *0.31 = 84.94 mn EUR
Brokerage: 446 mn * 1.81 = 807.26 mn EUR

Or combined 892.2 mn EUR “sum of parts”. If we compare this with April SA’s current market cap of ~510 mn EUR, this would give us an implicit discount of -43%, despite being a more profitable company than the peer group I have used.

A quick look at the chart shows, thath currently April seems to be out of favour, like many other European stocks:

Why is the company so cheap ?

This is always the most important question to ask when one has “found” an interesting stock. In my opinion, there are a couple of reasons why April could be significantly undervalued:

1. General distrust against all French/European financial companies
2. Intransparent segment reporting of April (no split between brokerage and insurance)
3. no short term catalyst available (company majority owned by founder)

On the plus side, I find the following points interesting

4. Company is currently reducing insurance business and promotes brokerage business
5. Founder and majority owner has appointed new CEO for transformation
6. April is active in the most attractive parts of the insurance market and has lots of growth potential

Summary: Based on a very simple “sum of parts” valuation, April SA’s current valuation seems not to correctly value the relative attractive insurance brokerage segment. The reasons for that could lie in some general issues with French financial companies rather than company specific factors. So from my point of view, April is worth a more detailed analysis in the coming weeks as a potential “financial” stock to invest in.