Commitment To 80% Cash Payout Will Make Stock More Attractive

Key Takeaways

• Baloise's refocusing strategy prioritizes profitability and streamlined operations, potentially boosting revenue growth and net margins in core markets.
  
• The company's commitment to cash payouts and strategic share buybacks may drive earnings per share growth and enhance stock appeal.
  
• Baloise faces risks from natural disasters and strategic focus shifts, affecting profitability, workforce, market diversification, and targeted market bets.

Catalysts

Primarily engages in the insurance and banking businesses in Switzerland, Germany, Belgium, Luxembourg.

• Baloise's refocusing strategy focuses on operational profitability and streamlining its business portfolio, ensuring a more targeted approach that could enhance revenue growth and improve net margins across its core markets.
  
• The company's plan to increase cash remittance to over CHF 2 billion from 2024 to 2027, combined with a higher capital productivity target (ROE of 12% to 15%), is expected to significantly enhance shareholder earnings.
  
• Baloise's commitment to a total cash payout target of at least 80%, supported by reliable dividends and potential share buybacks, enhances the attractiveness of the stock and could drive earnings per share (EPS) growth.
  
• The implementation of cost efficiency measures, including a reduction of 250 FTEs and a 2 to 3 percentage point improvement in the expense ratio, is expected to contribute to higher net margins and profitability in the Non-Life segment.
  
• Baloise's emphasis on growing its Swiss banking and insurance model, and leveraging digital tools like EasyAsk to improve customer satisfaction, is likely to result in increased revenue and earnings contributions from the Swiss market.

Baloise Holding Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Baloise Holding's revenue will grow by 13.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.3% today to 6.1% in 3 years time.
• Analysts expect earnings to reach CHF 517.5 million (and earnings per share of CHF 11.47) by about February 2028, up from CHF 253.7 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as CHF451.0 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 16.6x on those 2028 earnings, down from 29.8x today. This future PE is lower than the current PE for the GB Insurance industry at 18.9x.
• Analysts expect the number of shares outstanding to decline by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 4.16%, as per the Simply Wall St company report.

Baloise Holding Future Earnings Per Share Growth

Risks

• The severe storm event in Switzerland, which led to larger claims, highlights the risk of increased natural disaster claims impacting the non-life segment's earnings, potentially affecting profitability and cash flow.
  
• The shift away from experimenting with ecosystems and focusing strictly on the core business might limit future revenue streams and market diversification, affecting potential growth in earnings.
  
• The high load of claims in the non-life segment, influenced by environmental factors, could lead to unpredictability in revenue, further impacting net margins adversely if such events increase in frequency.
  
• The pressure to reduce expenses through workforce reductions (250 FTEs) could pose operational risks and affect service delivery, potentially impacting the company's revenue if not managed effectively.
  
• The strategic bets on markets like Germany, with a focus on targeted segments, pose a risk if those segments do not perform as expected, which could constrain revenue growth and cash remittance targets.

Valuation

• The analysts have a consensus price target of CHF168.5 for Baloise Holding based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of CHF190.0, and the most bearish reporting a price target of just CHF150.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be CHF8.5 billion, earnings will come to CHF517.5 million, and it would be trading on a PE ratio of 16.6x, assuming you use a discount rate of 4.2%.
  
• Given the current share price of CHF167.0, the analyst price target of CHF168.5 is 0.9% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.