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Market upbeat on AXA stake in RESO

AXA’s agreement to pay EUR810mn for a 36.7 percent stake in Russian insurer RESO Garantia has received an upbeat response from the investor community.

Collins Stewart analyst Tim Young described the move, which also gives the French giant the option to purchase the remainder of the shares in 2010 and 2011, as likely to “stimulate profitable growth” due to low financial services penetration and integration into the European economic system in Central and Eastern Europe. 

In a note carrying a BUY recommendation on AXA stock, which reached a high of EUR39.22 after opening at EUR38.99 when the deal was announced on December 21, Young said an AXA-RESO joint venture “will develop a presence in life and pensions”. RESO has a 7 percent stake in the Russian non-life market.

RESO was reportedly valued at $2bn to $2.4bn when it planned to make its debut in the public markets earlier this year but the initial public offering (IPO) was postponed.

Explaining the higher costs of the transaction, Young added that EUR810mn represents an estimated price to earnings ratio of 28x and a price to book of 11x.

“This is 25 percent ahead of the indicative price for the planned IPO of the business earlier this year and twice the in-price for the EBRD, which earlier took a 10 percent  stake. Nonetheless, this is a highly profitable business (H107 combined ratio of 87 percent), the underwriting cycle is at its nadir and, given low penetration in the territory (non-life 2.3 percent vs 9.1 percent EU and virtually no life industry at all), growth is likely to be circa 20% pa,” he said.

Young also said that Collins Stewart EUR35 target price was conservative and that “if AXA is able to achieve its goals for Ambition 2012 (wholly attainable in our opinion), we would expect value accretion of 40-50 percent.”

 “Meanwhile, investors enjoy a 2008 yield of 5.4 percent  and 15 percent dividend growth. The stock trades at a mere 1x 2008 embedded value (versus a sector average of 1.3x) and is on an IFRS PE of 9x. The stock has performed in line with a weak European insurance sector yet is a core holding,” he added.

Young also said that the “entire sector” had been “de-rated” based on a “misconception” that insurers would “share in the damage wrought on the banks by the US sub-prime mortgage fiasco.

“Nothing could be further from the truth. Certainly, the IFRS balance sheet will suffer from unrealised losses in the corporate bond portfolio but insurers hold to maturity so the economic damage is minimal. 2008 will see a welcome return to fundamentals and AXA is stellar,” he concluded.

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