August 23, 2013
by Francisco Marcelino and Ney Hayashi
BB Seguridade SA, the Brazilian insurer that held the world’s largest initial public offering this year, is outperforming every other IPO from an emerging- market financial company this year. The rally isn’t over yet, according to a survey of analysts.
Since it started trading on April 29, BB Seguridade has climbed 8.6 percent, the biggest gain among the 12 financial firms from developing economies that held an IPO of at least $100 million this year, data compiled by Bloomberg show. The Brasilia-based insurer may rise 22 percent more in the next 12 months, according to a Bloomberg survey of seven analysts.
BB Seguridade is gaining market share by taking advantage of the distribution network at Banco do Brasil SA, its controlling shareholder and Latin America’s biggest bank by assets. Revenue for the industry has been expanding at about 20 percent a year, according to the Brazil insurance federation, sustained by rising employment, higher wages and the expansion of Brazil’s middle class.
“BB Seguridade is rising because of fast growth, an amazing margin and dividends,” Rodolfo Amstalden, an equity analyst at consulting firm Empiricus Research in Sao Paulo, said in a telephone interview. “BB isn’t a cyclical case. It isn’t a commodities case. It’s sheltered from economic conditions.”
BB Seguridade raised 11.5 billion reais ($4.7 billion) in its April IPO, selling shares at 17 reais apiece. They dipped below the offer price two months later, before rallying to as high as 20.10 reais on Aug. 12. The shares gained 0.4 percent to 18.55 reais at 10:36 a.m. in Sao Paulo.
“BB Seguridade’s IPO was a great opportunity for larger investors willing to get into Brazil’s insurance market,” Marcelo Labuto, the firm’s chief executive officer, said in a telephone interview from Brasilia. “BB Seguridade standalone was bigger than all publicly traded insurance companies in Brazil.”
Gains since the IPO outpaced the 5 percent advance of UPDC Real Estate Investment Trust/Nigeria, the second-best performing emerging-market IPO from a finance company this year. Seven of the 12 companies have declined since their IPOs. The data excludes MPHB Capital Bhd, which sold shares in June to existing investors.
The MSCI Emerging Market Insurance index of 24 companies has dropped 4.8 percent since BB Seguridade started trading on April 29. China Life Insurance Co., the biggest company by market value on the gauge, dropped 8.7 percent in the same period.
BB Seguridade controls all of Banco do Brasil’s insurance businesses, including joint ventures with Madrid-based Mapfre SA. The firm offers life, health and property insurance.
Insurance premiums climbed 37 percent to 11.5 billion reais in the second quarter from a year earlier. In the first six months of this year, insurance revenue nationwide increased 20 percent from a year earlier and may expand 19 percent in 2013, Brazil’s insurance federation CNseg said this month.
Demand for insurance is rising after Brazil added about 35 million people to its middle class in the past decade, according to research-company Datapopular. In the same period, the jobless rate declined by half to 5.6 percent in July.
BB Seguridade’s second-quarter adjusted net income rose 31 percent to 550.3 million reais from a year earlier, the company said last week. The insurer plans to pay 817.8 million reais in dividends to shareholders, or 41 centavos a share, on Aug. 30, according to its earnings statement. The company’s policy is to pay shareholders 80 percent of net income in dividends.
“BB Seguridade posted very strong earnings,” Banco Bradesco BBI SA analysts including Carlos Firetti wrote in a note to clients last week. The analysts, who rate BB Seguridade their top pick among banks and insurance companies they cover, are “confident that results may continue improving in the coming quarters.”
Brazil’s insurance industry will continue growing faster than the overall economy, pushed by the growing middle class, said BB Seguridade’s Labuto, who expects the company to outperform the market. Since 2003, Brazilian consumers have been opening bank accounts and tapping credit to buy cars and houses, and they want to protect those purchases, he said.
“We have the appropriate products and Banco do Brasil’s powerful network distribution with branches in almost every Brazilian city,” he said. “Brazil is still forming a huge middle class, which gives us the confidence growth is certain and sustainable in coming years.”
Other companies are better poised to benefit should Brazil’s economy rebound, said Joao Pedro Brugger, a portfolio manager at Leme Investimento. He cited brewer Cia. de Bebidas das Americas and retailer Cia. Brasileira de Distribuicao Grupo Pao de Acucar.
“We still have the same opinion we had in the IPO, that in terms of price the stock is not attractive,” Brugger, who helps manage about 350 million reais, said in a telephone interview from Florianopolis, Brazil. “It’s a good company with a strong market position, but you’d have to get it for the right price.”
BB Seguridade trades at 16.6 times its 2014 forecast earnings, which compares with a ratio of 9.5 for the MSCI Emerging Markets Index, according to data compiled by Bloomberg.
BB Seguridade increased its share of Brazil’s insurance- market revenue to 25.2 percent in the second quarter from 21.6 percent a year earlier, it said last week. The company expects return on equity, a measure of profitability, to range from 37 percent to 41 percent. ROE was 39 percent last quarter.
“The strong second quarter and the 2013 guidance leave us more bullish,” Grupo BTG Pactual analysts including Eduardo Rosman wrote in a report to clients last week. BB Seguridade offers a “unique combination of strengths,” with “solid growth prospects” and “juicy dividends,” the analysts wrote
Editors: Steve Dickson, Steven Crabill