Ensurance Limited (ASX:ENA), a AUDA$6.15M small-cap, operates in the insurance industry, which is a large constituent of the economy by virtue of the amount of premiums it collects and the role it plays by covering personal and business risks. Financial services analysts are forecasting for the entire industry, a relatively muted growth of 1.61% in the upcoming year , and a strong near-term growth of 19.53% over the next couple of years. However, this rate came in below the growth rate of the Australian stock market as a whole. Today, I will analyse the industry outlook, and also determine whether ENA is a laggard or leader relative to its financial sector peers. See our latest analysis for Ensurance
What’s the catalyst for ENA’s sector growth?
Amid challenges from regulatory disruption, increasing consumer expectations and sluggish sales, insurers will increasingly consider technology integration to drive growth and efficiency. Over the past year, the industry saw growth of 5.46%, though still underperforming the wider Australian stock market. ENA lags the pack with its sustained negative earnings over the past couple of years. The company’s outlook seems uncertain, with a lack of analyst coverage, which doesn’t boost our confidence in the stock. This lack of growth and transparency means ENA may be trading cheaper than its peers.
Is ENA and the sector relatively cheap?
The insurance industry is trading at a PE ratio of 23x, relatively similar to the rest of the Australian stock market PE of 18x. This means the industry, on average, is fairly valued compared to the wider market – minimal expected gains and losses from mispricing here. Furthermore, the industry returned a similar 10.88% on equities compared to the market’s 11.91%. Since ENA’s earnings doesn’t seem to reflect its true value, its PE ratio isn’t very useful. A loose alternative to gauge ENA’s value is to assume the stock should be relatively in-line with its industry.
What this means for you:
Are you a shareholder? ENA has been a insurance industry laggard in the past year. If your initial investment thesis is around the growth prospects of ENA, there are other insurance companies that have delivered higher growth, and perhaps trading at a discount to the industry average. Consider how ENA fits into your wider portfolio and the opportunity cost of holding onto the stock.
Are you a potential investor? If ENA has been on your watchlist for a while, now may be a good time to dig deeper into the stock. Although its growth has delivered lower growth relative to its insurance peers in the near term, the market may be pessimistic on the stock, leading to a potential undervaluation. Before you make a decision on the stock, I suggest you look at ENA’s future cash flows in order to assess whether the stock is trading at a reasonable price.