By Jenny Ruth
Wednesday 23rd March 2011
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The market appears to have more than priced in the impact of the Christchurch earthquake on Tower, says Adrian Allbon, an analyst at Goldman Sachs & Partners.
He estimates private insurers face a combined claims bill between $1.1 billion and $3.5 billion and is assuming Tower's share of this will be between 8% and 10%.
On those assumptions, Tower's claims exposure should be between $157 million and $196 million. Based on its larger competitor AMI's disclosed reinsurance limit, Tower's upper reinsurance limit should be about $287 million, Allbon says.
"On our base case damage and share estimates, Tower's claims exposure is contained within our estimate of its reinsurance limit. Therefore, if investors become comfortable with our assessment, we would expect the stock to re-rate 12% to $191 per share," Allbon says. His sum-of-the-parts valuation is $2.42 per share.
Under his high scenario for both damage and Tower's market share, its post-reinsurance exposure of $142 million would be covered by its cash in hand, $139 million and the end of September 2010, and wouldn't necessarily require a capital raising, he says. However, under that high scenario, his adjusted sum-of-the-parts valuation would be $1.65 per share.
Following Tower's Christchurch-based profit warning, Allbon has cut his net profit forecast for the year ending September 2011 from $49 million to $33.7 million and his 2012 forecast from $55.1 million to $51.6 million.
Recommendation: Buy (raised from Hold).
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