Tuesday, April 7, 2020

An AIM International Equity holding: AIA Group Ltd. (AAGIY, $37.11): “An Insured A+ (AIA)” by Erik Floyd, AIM student at Marquette University

AIA Group Ltd. (AAGIY, $37.11): “An Insured A+ (AIA)”
By: Erik Floyd, AIM Student at Marquette University

Disclosure: The AIM International Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.

AIA Group Limited, Sponsored ADR. (OTC: AAGIY) is the largest public listed pan-Asian life insurance group. AIA engages in the provision of life insurance and operates in Hong Kong, Thailand, Singapore, Malaysia, China, Korea, the Philippines, Australia, Indonesia, Taiwan, Vietnam, New Zealand, and many more countries in the Asia-Pacific region.

• AIA’s strategic acquisitions and partnerships will continue to supply inorganic growth and bring in millions of new customers across the Asia-Pacific region.

• AIA’s strong demand and growth of insurance in the Asia-Pacific region will continue to drive top line revenue in the future years.

• AIA has consistently raised dividends (1.94% FY2020E) and holds a strong cash dividend coverage ratio (7.3x, FY2019).

• AIA has maintained a well-positioned management that will continue to increase the efficiency and growth of the company.

Key points: AIA Group Ltd. Has continued to develop their long-term acquisition and partnership strategies. Their acquisition of the Commonwealth Bank of Australia’s life insurance business has given them access to 13 million new customers with a 20-year bancassurance distribution agreement allowing them to sell their products to the bank’s client base. In addition to this deal that will be finalized in December FY2020, they have capitalized on other partnerships like SK Holdings in South Korea, giving them access to 30 million new customers.

Economic growth has continued to accelerate through the Asia-Pacific region, with domestic consumption being a large driver in consumer spending that will benefit AIA through increased product sales. The number of medical insurance claims in China specifically has grown at a 7.04% CAGR over the past seven years (FY12-FY18), and China annually spends over 6% of GDP on healthcare. The Asia-Pacific region has a quick growing middle class which will also contribute to the growth of insurance in the future. AIA’s major brand in this region will benefit them as they continually improve their image through loyalty and acquisitions.

AIA’s increasing dividends create a strong reflection of the company’s overall growth and opportunities in the region. Their FY2019 dividend of 1.5% reflects a 1-year dividend growth of 25%, and a 3-year dividend growth of 75.6%, with forecasts of continual increases in the future years. In addition to their growing dividend, AIA has a very strong cash dividend ratio of 7.3x, and strong liquidity ratios that reflects their profitability through a potential downturn.

AIA’s management has been on the forefront of creating an extremely reputable brand for AIA through their products and broad outreach across the Asia-Pacific region. Their management has been with the company since its IPO in 2010 and many officers have 30+ years of experience in the Asian life insurance industry. Increased ownership from insiders and institutional investors helps reflect the positive sentiment that investors have on management and their decisions.

What has the stock done lately?
Relative to the recent effects of the Coronavirus outbreak in the global markets, AAGIY has been able to protect their downside in comparison to the benchmark and has recently showed signs of recovery. Since March 20th, AAGIY has recovered to -6.87%, which is 3.5% better than the benchmark’s performance in the same period. AIA recently granted 5.86 million options to its employees, showing the investment in themselves through their future performance.

Past Year Performance: AAGIY has decreased 12.64% in value over the past year, which is due to the impacts of COVID-19 since the end of January. Focusing on the performance of AAGIY from April 2019 to January 2020, the stock increased 10.21% which accurately accounted for the growth of the company. The current situation has created an opportunity for a deeply discounted P/E multiple, which has deviated from its 24.10x average to a current P/E of 16.55x.

Source: FactSet

My Takeaway
AAGIY’s large exposure and market share in the Asia-Pacific Region is a big positive factor that will protect from a potential downturn in the global economy. The company’s efficient management, acquisition strategy, and unique opportunity to grow top line revenues in the region will set them up in a very valuable position in the future years. 

A stable and increasing dividend provided by AIA, and a large increase in the grant of employee options reassures company sentiment and will be a very steady holding through a potential downturn.

Source: FactSet