2013 has been the year in which even the most hardened stock market bears have admitted that we’re in a five-year bull market — and it’s not over yet.
Although the FTSE 100 has slipped back from the five-year high of 6,875 it reached in May, it is still up 6.9% this year, and is 50% higher than it was five years ago.
Unfortunately, RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSANY.US) hasn’t joined the rally, and a multitude of profit warnings and other problems have seen its share slump by 28% so far this year, leaving them 35% lower than they were five years ago.
Back to basics
Will RSA prove to be a recovery buy that outperforms the market in 2014? I suspect it’s too early to say, but one thing we can do today is to treat RSA’s falling share price as a potential buying opportunity, and take a look at its fundamentals, to see if they show any signs of offering investing value:
| Ratio | Value |
|---|---|
| Trailing twelve month P/E | 8.8 |
| Trailing dividend yield | 6.9% |
| Net asset value per share | 99p* |
| IGD surplus cover | 1.5 x |
* 92p exc. pension deficit.
On the face of it, these figures don’t necessarily seem too bad, but in reality, they’re not great. RSA’s second-half earnings are likely to fall, increasing its P/E, while a further dividend cut also seems likely, as RSA seeks to preserve capital to save its ‘A’ credit rating.
Similarly, although RSA’s shares currently trade at a discount to its book value of 99p per share, this has fallen from 107p at the end of last year, and excludes a 7p per share pension deficit. The firm’s IGD surplus cover — a measure of capital in excess of regulatory requirements — has also fallen this year, from 1.9 times at the end of 2012, to its current level of 1.5 times.
A troubled year ahead?
RSA’s latest update says that it is undertaking a full review of its business and expects to deliver ‘mid-single digit return on equity’ in 2013 — which by my reckoning equates to earnings per share of 6-7p.
The question is whether the firm’s profits can recover quickly in 2014. At the time of writing, analysts’ consensus forecasts have been downgraded for 2013, but remain fairly positive for next year:
| 2014 Forecasts | Value |
|---|---|
| Price to earnings (P/E) | 7.3 |
| Dividend yield | 7.1% |
| Earnings growth | 59% |
| P/E to earnings growth (PEG) | 0.2 |
To be honest, I don’t think these figures are realistic; I expect to see a further round of downgraded forecasts in the next month or two and believe that a dividend cut is also likely.