Aggressive Share Buybacks May Jeopardize Future Earnings In Nordic Pension Market

Key Takeaways

• Storebrand's Nordic presence and strategic focus on pensions and asset management drive revenue growth and market share expansion.
  
• Digital investments and sustainability commitment potentially boost customer satisfaction, efficiency, and revenue, while share buybacks ensure shareholder returns amidst future earnings leverage risks.
  
• Storebrand's strategic growth, sustainability leadership, and financial maneuvers strengthen its revenue potential, brand value, and shareholder returns while boosting future asset management growth.

Catalysts

Provides insurance products and services in Norway, the United States, Japan, and Sweden.

• Expectations for significant growth are underpinned by Storebrand's strong positioning and strategic initiatives in occupational pensions and asset management in the Nordic region. This structural growth and increased market share are likely believed to continue driving revenue growth.
  
• Increased digital investments and pursuit of a digital frontrunner status are expected to enhance customer satisfaction and operational efficiency, potentially improving both margins and earnings over time.
  
• Storebrand's commitment to sustainability, demonstrated by being the only Norwegian company on the Global Dow Jones Sustainability Index, may drive more sustainable investment inflows, positively impacting revenue and earnings.
  
• Large investments in share buybacks and dividends, supported by strong cash flow and operational results, indicate anticipated continuous shareholder returns, although they may also be critiqued as over-leveraging future earnings potential.
  
• Continued expansion and growth in the retail banking and insurance sectors, along with strong cost control measures, are predicted to bolster net profit, although they may bring risks if market conditions or growth assumptions change.

Storebrand Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Storebrand's revenue will decrease by 48.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 6.8% today to 42.8% in 3 years time.
• Analysts expect earnings to reach NOK 4.9 billion (and earnings per share of NOK 11.85) by about May 2028, down from NOK 5.5 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 13.3x on those 2028 earnings, up from 9.8x today. This future PE is greater than the current PE for the GB Insurance industry at 13.0x.
• Analysts expect the number of shares outstanding to decline by 2.11% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.81%, as per the Simply Wall St company report.

Storebrand Future Earnings Per Share Growth

Risks

• Storebrand has experienced strong double-digit growth across its business areas, supported by efficient cost control and successful strategic positioning. This growth trajectory could lead to increased revenue and a stable net margin in the future.
  
• The company has executed value-accretive transactions, such as the acquisition of the Danish Infrastructure business and its own headquarters, which may positively impact earnings and cost management.
  
• Storebrand continues to leverage its position as a leader in sustainability, being the only Norwegian company on the Global Dow Jones Sustainability Index, potentially enhancing its brand value and attracting sustainable investors, supporting revenue and earnings.
  
• The company is increasing its dividends and engaging in substantial share buybacks, reflecting strong confidence in its cash generation capabilities and potential to improve earnings per share.
  
• With continued structural growth in Unit Linked reserves and successful bids in public pensions, Storebrand is positioned for sustained asset under management growth, which can positively impact management fees and thus revenue and net margins.

Valuation

• The analysts have a consensus price target of NOK131.667 for Storebrand 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 NOK150.0, and the most bearish reporting a price target of just NOK115.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be NOK11.4 billion, earnings will come to NOK4.9 billion, and it would be trading on a PE ratio of 13.3x, assuming you use a discount rate of 6.8%.
• Given the current share price of NOK124.9, the analyst price target of NOK131.67 is 5.1% 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.