Is There An Opportunity With UnipolSai Assicurazioni S.p.A.’s (BIT:US) Mispricing?

Becky Mayes

Mon, Feb 18, 2019, 5:15 AM

Valuing US, an insurance stock, can be daunting since these financial firms generally have cash flows that are impacted by regulations that are not imposed upon other industries. For example, insurance companies are required to hold more capital to reduce the risk to shareholders. Emphasizing line items such as book values, on top of the return and cost of equity, is beneficial for computing US’s true value. Today I’ll determine how to value US in a fairly useful and uncomplicated method.

See our latest analysis for UnipolSai Assicurazioni

What Model Should You Use?

There are two facets to consider: regulation and type of assets. Strict regulatory environment in Italy’s finance industry reduces US’s financial flexibility. Furthermore, insurance companies usually do not possess significant amounts of tangible assets on their balance sheet. This means the Excess Returns model is best suited for calculating the intrinsic value of US rather than the traditional discounted cash flow model, which has more emphasis on things like capital expenditure and depreciation.

BIT:US Intrinsic Value Export February 18th 19

Deriving US’s Intrinsic Value

The key assumption for this model is, the value of the company is how much money it can generate from its current level of equity capital, in excess of the cost of that capital. The returns in excess of cost of equity is called excess returns:

Excess Return Per Share = (Stable Return On Equity – Cost Of Equity) (Book Value Of Equity Per Share)

= (0.11% – 9.3%) x €2.23 = €0.046

We use this value to calculate the terminal value of the company, which is how much we expect the company to continue to earn every year, forever. This is a common component of discounted cash flow models:

Terminal Value Per Share = Excess Return Per Share / (Cost of Equity – Expected Growth Rate)

= €0.046 / (9.3% – 2.9%) = €0.72

Combining these components gives us US’s intrinsic value per share:

Value Per Share = Book Value of Equity Per Share + Terminal Value Per Share

= €2.23 + €0.72 = €2.95

This results in an intrinsic value of €2.95. Relative to the present share price of €2.17, US is , at this time, priced beneath its true value. This means there’s an upside to buying US today. Valuation is only one side of the coin when you’re looking to invest, or sell, US. There are other important factors to keep in mind when assessing whether US is the right investment in your portfolio.