Financial holding company
The author is an analyst for Shinhan Securities. She can be reached at heeyeon.lim@shinhan.com -- Ed.
Retain BUY and raise TP to KRW63,000 for sector top pick
We retain our BUY rating on Meritz Financial Group. Our target price is revised up by 65.8% from KRW38,000 to KRW63,000, based on a forward ROE of 28.8% and a cost of equity (COE) of 13.1%. We recommend Meritz Financial Group as our sector top pick given that: 1) it is the only financial company under our coverage with ROE exceeding COE; 2) its mid/long-term shareholder return rate stands at 50%; and 3) profit stability is secured, unaffected by the new guidelines on contractual service margin (CSM).
1Q23 review: Strong fundamentals of subsidiaries proven
Meritz Financial Group posted consolidated operating profit of KRW817.8bn (-4.1% YoY) and net profit of controlling interest of KRW536.9bn (-4.6% YoY) for 1Q23. Combined net profit of two key subsidiaries, Meritz Securities and Meritz Fire & Marine Insurance, increased KRW30.3bn YoY on a standalone basis, but dropped KRW52bn YoY after consolidated adjustments for special purpose companies (SPCs) and internal transactions.
We are upbeat on strong fundamentals of the subsidiaries to generate higher ordinary profits than their competitors. Meritz F&M Insurance has managed the difference between the estimates and actual amounts incurred to stay above KRW100bn based on conservative CSM assumptions. Its profit stability also stands out with a low share of highly seasonal auto and general insurance, 7.9% vs. peers’ average 29.2%. Meritz Securities continues to make stable profits in the real estate market slump thanks to conservative risk management. Losses related to contracts for difference is limited.
2023 NP of controlling interest forecast at KRW2.1tr (+93.7% YoY)
For 2023, we forecast consolidated operating profit at KRW2.9tr (+30.4% YoY) and net profit of controlling interest at KRW2.1tr (+93.7% YoY). Standalone net profit of Meritz F&M Insurance should reach KRW1.5tr (+80.4% YoY) and Meritz Securities KRW502.2bn (-34.7% YoY). The insurance profit growth under IFRS 17 will be more than enough to make up for the drop in securities profit.
The company’s cumulative shareholder return for the year to date comes to KRW412.7bn. The remaining amount to be paid out will be about KRW600bn, equivalent to 6.4% of the market capitalization based on May 15 close, considering the shareholder return rate of 50%. We expect stable earnings growth to lead to further improvement in shareholder value.