Up until last week, the forecasts for RSA Insurance Group (LSE: RSA) (NASDAQOTH: RSANY.US) were looking good, with a very nice 32% rise in earnings per share (EPS) expected. But those growth prospects may well have just evaporated, but why?
Well, it was full-year results time from RSA last week, and they came as a bit of a shock — after a year of weather-related losses on top of the £220m costs of the accounting irregularities scandal in the firm’s Irish operation, RSA revealed “disappointing” figures which included a pre-tax loss of £244m! Instead of a predicted 4p-per-share EPS, the firm slumped to a loss per share of 9.8p.
No final dividend
And what’s more, the final dividend has been cancelled, so the 2.28p per share paid out at the interim stage is all shareholders are going to get, for a yield of just 2.5% on the share price at the time — its now down to 95.4p with the effective yield dropped to 2.3%.
New boss Stephen Hester, known for his sturdy work in getting Royal Bank of Scotland back on track, went as far as to say “RSA’s 2013 results are poor and we need to grasp the nettles of both underperformance and undercapitalisation“, highlighting a bigger problem than any we were previously aware of.
Investors tapped for more cash
In response to press speculation ahead of the results, RSA had been forced to admit it was “considering measures to strengthen its balance sheet, including raising capital by way of a rights issue“, and Mr Hester has now confirmed that plan, going on to say “we simply do not have enough tangible equity to properly support our business” — unlike some top bosses, he’s not a man to mince his words.
Not just one bad year
And he didn’t blame it entirely on 2013’s woes, telling us that the firm had become “gradually undercapitalised and overleveraged” over a longer timescale — and we really need to ask why it’s taken a new boss to come along and spot that. With years of falling EPS, it’s now clear that something needed to be done sooner, while many of us had swallowed those upbeat forecasts and had assumed the worst was over — I certainly wasn’t expecting this bombshell.
The now-confirmed rights issue aims to raise £775m, but on its own it won’t be enough to get the business properly capitalised. As part of further measures, RSA will be embarking on a disposals path, and has already targeted a sum of £300m in 2014.
New forecasts
City analysts are, as we speak, poring over the numbers and tweaking their way across their spreadsheets to come up with their best guesses as to future profits and dividends, so we’ll have to wait for the dust to settle to see what the new consensus will look like.
But for now, all we can do is forget that EPS rise of nearly a third that was previously forecast. Oh, and don’t spend any of that predicted 4.4% dividend yield we thought we were going to get this year!
Growth sometime, maybe…
I’m sure RSA will get back to growth, especially as it now has one of our best bosses in charge. But there could still be more of a short-term share price hit — it’s already down more than 20% over the past 12 months.