TURSG – Buy: Diamond in the rough

Türkiye Sigorta is the market leader in Turkey’s non-life insurance sector, with

a 13.7% market share as of 1H21. Established through the merger of three state- owned insurers in August 2020, it enjoys a wide bancassurance network and dominates the market in niche and highly profitable products such as agriculture insurance. As such, it enjoys lucrative operating margins in an otherwise fragmented and competitive market. Its high profitability and robust capital positon gives it ample room to pay dividends. We see it having a sustainable ROE of 26% and 2022e dividend yield of 10%. For such compound and yield, the stock’s 1.35x 21e PB looks attractive. We initiate coverage with a Buy rating and TRY7.60 TP.

Vibrant economy and underinsured market provides decent growth potential: Turkey has one of the lowest non-life insurance penetration rates in EEMEA at 1.1% of GDP. We expect Turkish GDP to grow at a c.4% CAGR between FY21 and FY23, outpaced slightly by the non-life insurance sector’s GWP growth. We expect Türkiye Sigorta to grow its GWP at a 21% CAGR over the next three years as it preserves its dominant position in its niches and gains some market share in motor insurance.

A highly profitable business thanks to competitive advantages: Türkiye Sigorta generates c.50% of its GWP through its bancassurance business with state banks
(<10% for the rest of the system) where policy acquisition costs are low. This model
also provides it with a unique premium mix: general losses and fire & natural disaster
segments with low loss ratios account for c.55% of premium production, while the
rest of the system is heavily exposed to motor insurance with high losses. As such,
Türkiye Sigorta enjoys higher technical margins than peers.

Going forward we expect losses to increase for all players as mobility rises post COVID-19 and Türkiye Sigorta’s margins to normalise from 19% in FY20 to 5% in FY23e. This normalisation, together with stagnating financial income owing to falling rates, might limit the FY20- 23e earnings CAGR to 6%, and settle the ROE at a sustainable 26%. Yet, we think the current valuation more than reflects this base-affect-related slowdown.
Valuation: Türkiye Sigorta’s shares have dropped 25% YTD as local investors took
profits post the merger. This weak performance, despite strong profitability, has brought the valuation to attractive levels. Note that foreign ownership of the stock is
very low which contradicts with the quality of the business. Though its 19% free float
is relatively low, it still has a daily trading volume of USD5m per day, which we think
is decent for a small cap. We think improving communication of the company with
financial markets could put it on investors’ radar and benefit its valuation.



Source: HSBC Global Research