Is Genworth deep in value-play territory?

While the interim result of lenders’ mortgage insurance (LMI) provider, Genworth Mortgage Insurance Australia (ASX: GMA) may have given shareholders little to crow about, with underlying net profit after tax declining 5.3% to $264.7 million – and net earned premium expected to decline by as much as 5% in 2016 – its capital management plans have arguably captured the market’s imagination.

Revelations that shareholders could be set for a windfall, courtesy of planned capital management, saw the previously down-trending stock jump around 10% on 30 March.

The recent share price rally comes as welcome relief for those who backed the stock when it listed on the ASX back in May 2014 during an IPO issue price of $2.65.

Assuming all goes to plan, Genworth shareholders will approve the company’s distribution and share consolidation resolutions at its May 5 AGM.

Following a recently completed a $150 million share buyback plan, the company is planning a $202 million capital reduction in the form of a 34 cents per share (CPS) distribution, plus a possible $48 million share buyback.

As part of its capital management initiatives, Genworth also declared a fully franked special dividend of 5.3 cents per share.

At face value, there’s no reason why shareholders wouldn’t give this [capital reduction] the thumbs-up.

The stock has a $165 million funding surplus, and these capital management initiatives would go a long way to balancing its capital base objectives in line with policyholder obligations, delivering long-term shareholder returns, while maintaining the flexibility to grow the business going forward.

But even if capital reduction plans are not approved, it’s understood that management will be contemplating a $250 million buyback instead.

Admittedly, a slowing property market and a tightening of lending standards, means that Genworth expects lower levels of new insurance. As a result, excellent earning per share (EPS) growth and return on equity (ROE) are expected to enter a period of flat-lined growth.

Genworth’s proposed distributions are not expected to be regarded as dividend for income tax purposes. However, they are expected to reduce the number of shares on issue by around 14.5%, and this will have some material impact of EPS and ROE growth going forward.

Genworth does appear to have been over-sold, especially given the strong position it has within the domestic LMI market.  

The stock has commercial relationships with over 100 lenders across Australia, including three banks. If management didn’t think it could maintain strong levels of profitability, it’s unlikely it would be so ‘gung ho’ about advancing its capital management initiatives.

At $2.51, the stock is still trading at a 40%-plus discount to its all-time high of $4.38 about one year ago, a 47% discount to its intrinsic value (IV) value of $4.30, plus a price to earnings (P/E) ratio of 6.40 times, which means it’s look to be in prime value-play territory.

Those prepared to take a long-term position on the stock may not get a better opportunity to enter the stock at what, in hindsight, may end up being an attractive entry point.